India is stepping up its crypto oversight with a new enforcement-focused initiative that could reshape how offshore exchanges operate in the country. According to a newly released report from the Financial Action Task Force (FATF), India is developing a “Virtual Asset Lab” to continuously detect offshore crypto platforms serving Indian users without proper registration.

The disclosure appears in FATF’s March 2026 report on the risks posed by offshore Virtual Asset Service Providers, or oVASPs. This is a significant development because offshore exchanges have long operated in the grey zones of global crypto regulation.

FATF includes a dedicated India case study explaining that offshore VASPs often onboard Indian users with little or no KYC, use domestic payment channels such as UPI or card networks, & route withdrawals into Indian bank accounts or wallets through locally registered intermediaries.

• What FATF Means by Offshore VASPs
• Why India Is Building a Virtual Asset Lab
• The Risks FATF Sees in This Model
• India’s Detection & Enforcement Strategy

What FATF Means by Offshore VASPs

FATF defines offshore VASPs as crypto service providers created under the laws of one jurisdiction, with or without a physical presence there, that provide services to clients residing in other jurisdictions. The report focuses particularly on cases where these platforms actively provide services into foreign markets without being licensed or registered there.

The report also makes an important distinction, i.e., not every offshore VASP is necessarily acting with bad intent, but some are. That distinction matters because it frames the issue not merely as a compliance gap, but as a structural challenge.

Offshore exchanges can operate entirely through apps, websites, affiliate networks, influencers, or payment intermediaries. Even without a local office, they can still market heavily, onboard users, & move funds across borders with relative ease.

Why India Is Building a Virtual Asset Lab

India’s planned Virtual Asset Lab appears to be a direct response to this increasingly sophisticated offshore activity. FATF notes that when Indian authorities identify multiple red flags linked to a VASP, FIU-India begins supervisory action & directs the entity either to comply with AML/CFT rules or cease operations.

The next step now is building stronger detection capacity through an indigenous Virtual Asset Lab that can continuously identify high-risk, unregistered platforms using analytics, open-source intelligence, & automated web surveillance tools. This suggests India is moving beyond passive reporting & into proactive detection.

Instead of waiting for suspicious activity to surface after the fact, regulators appear to be building infrastructure that can scan the market for warning signs in real time. FATF’s wider report recommends this kind of approach, noting that jurisdictions may need a mix of blockchain analytics, web scraping, open-source intelligence, suspicious transaction reports, market intelligence, & law-enforcement inputs to identify offshore VASPs effectively.

The FATF case study on India is one of the clearest parts of the report because it shows exactly how offshore platforms continue to reach Indian customers. According to the report, these platforms commonly onboard Indian customers with minimal or no KYC, accept deposits through domestic channels like UPI or card networks, & enable withdrawals into Indian bank accounts or wallets by routing payouts through compliant intermediaries or locally registered VASPs.

That model is powerful because it combines the convenience of local market access with the regulatory distance of being offshore. From the user’s perspective, the platform still feels accessible & functional.

From the regulator’s perspective, however, the entity may be harder to supervise because core compliance functions, customer data, or operational teams sit outside the country. FATF also lists several red flags jurisdictions can use to detect such activity.

These include the absence of geo-blocking, platform content using local language or currency, app-store presence in the target market, use of domestic on-ramps or off-ramps, trading tutorials aimed at local users, marketing via influencers, local event sponsorships, & other forms of targeted solicitation. This means offshore exchange activity is not always hidden.

The Risks FATF Sees in This Model

The report argues that offshore VASPs can create meaningful anti-money laundering vulnerabilities when they operate from jurisdictions with weak or underdeveloped frameworks, or when host countries do not require them to register locally. One major concern is that some offshore platforms reduce KYC requirements to attract users.

FATF says these entities may convert lower compliance costs into better pricing, faster onboarding, or broader access, which in turn undermines the level playing field for regulated exchanges. Another concern is illicit finance exposure.

The report also highlights regulatory arbitrage. In one India-linked example, FATF says that after India introduced its virtual asset tax regime, a significant proportion of trading activity shifted from Indian onshore VASPs to offshore unregistered platforms.

India’s Detection & Enforcement Strategy

The Virtual Asset Lab is only one part of India’s broader response. FATF says FIU-India already initiates supervisory actions when entities raise multiple red flags, issuing notices under relevant AML/CFT regulations & directing them to explain their failure to register or meet reporting obligations.

The report also points to India’s use of suspicious transaction reports from onshore VASPs as a detection tool. In one case, FIU-India conducted operational analysis after an Indian VASP identified an offshore unregistered entity disguised as an online gambling platform offering unlawful on-ramp & off-ramp services to Indian residents.

India has also created channels to work with intermediaries. FATF notes that the Ministry of Home Affairs launched the Sahyog portal to streamline takedown notices to online intermediaries, which FIU-India has used to direct website content removal. According to the report, 85 URLs linked to unregistered non-compliant oVASPs had already been taken down.

This matters because India is one of the largest potential crypto markets in the world. If offshore exchanges can continue serving Indian users without registration, it weakens both oversight & competitive fairness.

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