Why cryptocurrency exchanges struggle to provide crypto withdrawals for Indians | Explained

The story so far: Mudrex, a crypto platform that is “US-headquartered and Bengaluru-based” made headlines this month when it announced it was temporarily pausing crypto withdrawals until January 28, to “enhance the security of our platform and safeguard against bad actors,” said the company in an official blog post on January 12.

This comes soon after another crypto exchange popular with Indians - CoinDCX - also confused customers with conflicting information regarding its crypto withdrawal policy.

Indian crypto investors want to deposit, withdraw, and trade crypto just like their international peers, but this is easier said than done. Crypto traders in the country face several barriers when transacting through centralised exchanges due to unclear domestic laws and vaguely defined risks. Crypto companies often cite these factors to justify restricting crypto withdrawals for customers, thus sparking alarm amongst investors.

What problems are crypto investors in India facing?

A crypto trader in India who signs up with a popular centralised exchange must undergo a detailed registration process and Know-Your-Customer (KYC) procedures in order to comply with India’s Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) regulations. Customers submit their national identity documents and verify themselves so that they can use the company’s platform without hurdles, ensuring seamless service in a market sector where asset prices can soar and crash in a matter of seconds.

It is no wonder then, that many users experience anger or panic when they make profits by trading in crypto through the centralised exchange, but then learn to their shock that they cannot withdraw their crypto through the same company.

Social media platform X is filled with complaints from crypto exchange customers who claim that crypto withdrawal policies have changed without warning, or that they were not flagged clearly in the first place.

This naturally leads to fear as crypto investors wonder if their exchanges are trying to hold on to user assets or are experiencing liquidity shortages.

Why are cryptocurrency exchanges restricting withdrawals?

Different crypto exchanges in India have different policies governing crypto withdrawals. While some allow crypto withdrawals, and others allow it for select users or under special circumstances, there are also companies that block crypto withdrawals for all users without exception.

The most common reasons cited include fears that the Indian authorities could penalise the crypto exchange as a whole if it is discovered that users have been withdrawing their assets in crypto. There are also fears that the withdrawn crypto could be used to carry out illicit acts or buy banned products through dark markets.

CoinDCX did not respond to The Hindu’s emails regarding its crypto withdrawal policy for this report, but co-founder Sumit Gupta published a thread on X outlining the company’s approach in this area.

Gupta on January 15 acknowledged that while users wanted unrestricted crypto withdrawals, the company had to comply with India’s “strict capital controls.” He noted the risks of expert criminals escaping detection.

“But once law enforcement agencies get to know about any such cases, they freeze the entire exchange bank accounts indefinitely while they investigate. These exchange bank accounts hold funds from both bad actors and genuine users, directly impacting the liquidity of INR funds of our genuine users,” said Gupta in his post on X, when justifying the block on crypto withdrawals.

Another platform, CoinSwitch, followed a similar policy.

“We do not allow crypto withdrawals on our platform[,] however, users can withdraw their investments by converting their crypto into INR on an exchange like ours, and receive the money in their bank accounts,” said Balaji Srihari, Vice President, CoinSwitch, in response to The Hindu’s query.

Meanwhile, crypto exchange Zebpay, which has its headquarters in Singapore apart from other international offices, offers two customer experience modes. One allows crypto withdrawals, while the other does not.

In response to The Hindu’s query, Raj Karkara, COO, ZebPay, confirmed that crypto withdrawals were allowed for manual transfers, but not for instant deposits.

“The Instant Deposit feature allows users to add INR funds instantly to their ZebPay accounts, enabling full access to trading and fiat withdrawals. However, crypto withdrawals are disabled while crypto deposits are fully available. This feature requires a one-time virtual account setup and supports transfers through IMPS, NEFT, and RTGS, following standard banking procedures,” said Karkara.

UPI will not be supported in this case.

Meanwhile, manual transfers will have users add Zebpay’s bank details to their net-banking apps and deposit funds from their registered bank accounts, as well as upload the image of the transaction receipt or bank statement for proof.

On the other hand, Binance - though not an Indian crypto exchange - registered as a reporting entity with FIU-IND in 2024 after previously being hit with legal action by the Indian authorities.

“Users based in India can withdraw crypto from their Binance accounts,” a Binance spokesperson said in response to The Hindu’s query, and did not note any restrictions.

Why is there such a difference? One reason is because Indian law enforcement authorities take a serious view of turning Indian rupees into other currencies, and especially when an easily traced asset (like INR) is converted to a harder to trace asset (like Bitcoin) that can be more easily laundered, sent to militants, or channelled into private wallets.

However, users should keep in mind that Binance and WazirX are locked in a legal dispute over whether or not Binance owns the Indian exchange. The legal situation is murky, with a lack of transparency from both sides, and is expected to continue for some time.

What options do crypto users in India have?

When crypto withdrawals are no longer an option for traders in India using centralised exchanges in the country, they often have to wait for policies to change with time, or pursue less desirable options.

For example, in the face of crypto withdrawal restrictions, many investors might resort to workarounds such as selling off their crypto and withdrawing their assets in rupees, even if this does not align with their investment plan. 

Others may be driven to international crypto exchanges that do not comply with Indian tax laws. 

Some traders may even avoid this hassle entirely by investing their funds through unregulated/decentralised exchanges with poor safeguards, or rely on platforms actively run by malicious actors. 

What needs to happen to enable crypto withdrawals?

The most glaring issue is an absence of clear regulations and laws governing the flow of crypto in India. While the government taxes crypto gains and transactions, the existing legislation does not protect Indian investors and does not encourage Indian crypto businesses either.

In the meantime, several crypto exchanges that support INR trading pairs are upgrading their security and KYC protocols.

CoinDCX’s Gupta said on X the exchange was working on an “enhanced due diligence framework” that would let eligible users withdraw their crypto in the future.

Mudrex also noted that it was working on security, but did not respond to The Hindu’s email.

CoinSwitch’s Srihari called for regulations so that crypto withdrawals could be opened.

“To officially enable crypto withdrawals for all customers in India, the introduction of clear regulations and a well-defined policy framework for VDAs is essential,” he said.

“Proper regulatory guidelines would provide clarity and address concerns around security, compliance, and the prevention of misuse, creating a safe and transparent environment for crypto transactions,” Srihari added.

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