India’s crypto industry, still recovering from the Reserve Bank of India’s 2018 banking ban, now faces what could be its most serious regulatory crisis yet.
The Enforcement Directorate (ED) last week conducted searches at six premises in Bengaluru under Section 37 of the Foreign Exchange Management Act (FEMA), targeting five companies accused of facilitating unauthorized cross-border money transfers worth over INR 2,500 crore using virtual digital assets (VDAs).
The firms named in the probe include Transak Technology India Pvt. Ltd., Carretx Technologies Pvt. Ltd. (Carret), Mokshagna Technologies Pvt. Ltd. (formerly Xpat/Remit2Any), Buyhatke Internet Pvt. Ltd. (Onramp.money), and Abhibha Technologies Pvt. Ltd. (Onmeta).
According to a report by The Economic Times, during the operation, the agency also froze bank accounts holding approximately INR 6 crore linked to the alleged transactions.
But the real significance of this action goes far beyond four or five companies. The legal reasoning that the ED has deployed strikes at the heart of how every crypto exchange in India operates.
The liquidity problem nobody wanted to talk about
Indian crypto exchanges depend on overseas sources to keep their order books running. In the absence of a deep domestic seller base, platforms routinely deal with offshore exchanges and entities, either directly or through intermediary liquidity providers, to acquire the digital assets they list for Indian traders.
This is the lifeblood of any crypto exchange. Without it, spreads widen, volumes collapse, and trading becomes impractical.
The trouble is that both available methods of paying for this offshore liquidity now sit under a legal cloud. The first option, transmitting USDT or other stablecoins directly to a foreign counterparty, bypasses the banking system entirely. To a blockchain enthusiast, that is the whole point of decentralized finance.
To the ED, it looks like a variant of hawala, an unauthorized transfer of value across borders without using the regulated forex channel.
The second option, routing funds through a bank, creates its own problem. No Indian bank will knowingly process a payment earmarked for purchasing cryptocurrency from abroad. That means any bank transfer used for this purpose likely requires a misleading declaration about the purpose of the remittance, which is itself a FEMA violation.
“What’s significant is the legal premise underpinning the enforcement action, and not merely specific allegations. Read broadly, that premise may not stay confined to remittance-style fact patterns, but extend to other cross-border VDA transactions, including over-the-counter (OTC) purchases,” said Purushottam Anand, Founder of Crypto Legal.
He added that given most VDAs are issued by overseas entities and the difficulty Indian players face in securing banking support for acquiring VDAs from abroad, this reasoning could pose a serious challenge for crypto businesses trying to source liquidity.
Anand believes the RBI needs to settle how VDAs are characterized under FEMA. Without that clarity, accessing offshore liquidity will remain, in his words, a regulatory minefield.
The legal contradiction at the core
Here is where the regulatory picture gets tangled. The ED’s treatment of cross-border crypto transfers as de facto money transfers has economic logic. When someone sends USDT from India to a wallet overseas, value has moved across a border. That much is straightforward.
But this interpretation clashes with positions taken by both the RBI and Indian courts. The Supreme Court, in its landmark 2020 ruling that struck down the RBI’s banking circular, did not classify cryptocurrency as currency. The Madras High Court reached a similar conclusion. If crypto is not currency under Indian law, then equating its movement with a money transfer is legally debatable.
“Both declined to treat crypto as currency. If crypto isn’t currency, equating its movement with money transfer is debatable. More so, because very little crypto is mined here, yet are freely available with trading volumes growing. This inevitably raises questions on how cryptos enter India, who pays for them, and how,” said Harshal Bhuta, a FEMA specialist.
That contradiction sits right at the centre of the current crisis. The government taxes crypto as a virtual digital asset. The courts have refused to call it currency. And now the ED is treating its cross-border movement as though it were money. All three positions cannot be held simultaneously.
Wallets, withdrawals, and the FEMA frontier
The ED’s action also brings into sharper focus the mechanics of how cryptocurrencies from overseas get deposited into and withdrawn from local exchange wallets, the on-chain flows that until now have operated in a space between regulation and neglect.
Sudhakar Lakshmanaraja, Founder of Digital South, a blockchain education trust, pointed out that the borderless nature of crypto can no longer be viewed only through the anti-money-laundering lens.
“Most platforms permit withdrawals, and once assets leave the platform, effective oversight is difficult. This has implications under RBI’s Liberalised Remittance Scheme (LRS) which forbids a resident individual from remitting beyond $250,000 a year,” he said.
Lakshmanaraja called for the RBI to step in and issue clear directions on deposits, withdrawals, payments, LRS applicability, and FEMA compliance for crypto transactions.
It is worth noting that some of the firms named by the ED are registered with the Financial Intelligence Unit (FIU-IND), India’s anti-money laundering watchdog that receives transaction data from crypto platforms. But the issues the ED has raised fall outside FIU’s mandate entirely. FIU deals with the Prevention of Money Laundering Act (PMLA).
The ED’s FEMA probe concerns foreign exchange violations, a completely different regulatory track, and one for which crypto platforms currently have no compliance framework to follow.
A broader crackdown already underway
The FEMA probe did not arrive in isolation. It is part of a wider enforcement push by the ED against crypto-linked financial activity.
On June 15, the agency searched multiple locations and arrested an individual in connection with an alleged INR 500 crore cryptocurrency Ponzi scheme involving the Korvio Coin (KRO) token, which investigators say affected more than 248,000 investors through a multi-level marketing operation. The same day, the ED filed a prosecution complaint in a separate money laundering case linked to a Coinbase phishing operation, alleging proceeds of crime worth INR 64.55 crore.
Earlier this year, the ED’s Director Rahul Navin publicly stated that cryptocurrency fraud is now a key enforcement priority for the agency, alongside terror financing and cyber-enabled crimes. During 2025-26, the ED filed 812 charge sheets, nearly double the previous period, with a conviction rate of 94%.
The FEMA investigation also arrives against the backdrop of a deeper structural problem. According to data presented to Parliament in May 2026, close to 90% of Indian crypto trading volume now happens offshore, driven out of the country by the 30% flat tax on gains, 1% TDS on transactions, and the very kind of regulatory uncertainty that the ED’s latest action has now amplified.
What happens next
The ED has emphasized that its findings remain preliminary and the investigation is ongoing. No enforcement orders or findings of liability have been announced against the companies beyond the allegations outlined in the FEMA probe.
But the damage may already extend beyond these five firms. The legal reasoning deployed by the agency, that crypto moving across borders without the banking system amounts to an unauthorized transfer of foreign exchange, applies in principle to every Indian crypto platform that sources assets from overseas. And that is nearly all of them.
The RBI, which has long maintained a skeptical posture toward private cryptocurrencies, has not issued any guidance on how VDAs should be treated under FEMA. As The Crypto Times reported in May, the central bank has been quietly building a surveillance framework over offshore rupee markets and crypto-linked capital flows, a move that industry observers believe could eventually extend to formal regulation or restriction of cross-border VDA transactions.
Until the RBI settles the classification question, every cross-border crypto transaction in India exists in a legal grey zone. The ED has now shown it is willing to walk into that grey zone with enforcement tools. The industry, having long treated FEMA as a sleeping dog, must now reckon with the fact that it has been woken up.
Also Read: From Demonetization to Digital Rupee: India’s Decade-Long Blockchain Journey
