India has launched a high-stakes investigation into cryptocurrency exchanges Binance and WazirX amid growing concerns about national security threats, cross-border fund transfers, and the use of crypto in potentially illegal activities. The probe, led by India’s Financial Intelligence Unit (FIU-IND) and supported by the Enforcement Directorate (ED), reflects the country’s escalating push for stricter crypto oversight in light of emerging geopolitical and financial risks.

Crypto Transfers Under Scrutiny: National Security Concerns

The primary concern prompting the investigation is the unregulated use of wallet-to-wallet transfers, particularly those between India and Pakistan. These transactions, often done through private wallets not linked to regulated exchanges, bypass traditional banking scrutiny and are difficult to trace.

Authorities have flagged a pattern of suspicious crypto transactions originating from Pakistan and targeting individuals or addresses in sensitive Indian regions such as Jammu and Kashmir. This region, already fraught with separatist tensions and historical insurgency, raises alarm when linked with unregulated digital flows that could fund illegal or terrorist activities.

The FIU-IND suspects these transfers may be exploited for money laundering or terrorist financing. Although there is no confirmed criminal link yet, the lack of transparency in private crypto wallets has forced agencies to monitor such activities more closely.

The situation escalated when the State Investigation Agency (SIA) in Jammu and Kashmir conducted coordinated raids across Jammu, Doda, and Kupwara. The raids targeted a suspected crypto-based financial network allegedly supporting cross-border militancy and radicalisation.

Binance and WazirX: Past Warnings and Current Investigations

Both Binance and WazirX have a troubled history with Indian regulators. Binance, the world’s largest crypto exchange by volume, re-entered the Indian market in mid-2024 after settling a major compliance case with the FIU-IND. The company paid an INR 18.9 crore fine (around $189 million in July 2024) and registered officially with the FIU-IND by August. Despite these efforts, Indian authorities recently froze some Binance-linked Indian bank accounts as part of ongoing probes into irregular wallet activities.

WazirX, once a major local player affiliated with Binance, has faced even more severe issues. In July 2024, the exchange suffered a massive hack by North Korea’s Lazarus Group, resulting in a $235 million loss. The breach exposed glaring vulnerabilities in the exchange’s security framework and Know Your Customer (KYC) processes.

To compound matters, a 72-page affidavit filed in Singapore alleged that WazirX indirectly facilitated the transfer of Tron (TRX) tokens, which were linked to ISIS financing. These accusations, while not yet fully proven, have intensified regulatory scrutiny and raised questions about exchange accountability and risk controls.

Diverging Crypto Paths: India vs Pakistan

India and Pakistan are moving in notably different directions when it comes to crypto regulation, a contrast that complicates cross-border monitoring.

India follows a cautious, compliance-driven approach. Since March 2023, all crypto exchanges operating in India must register with the FIU-IND and adhere to Anti-Money Laundering (AML) norms. This includes full KYC checks, record-keeping, and suspicious transaction reporting. India has also implemented a strict tax regime: crypto profits are taxed at 30%, with a 1% tax deducted at source (TDS). The 2025 Union Budget further introduced enhanced disclosure requirements for digital asset holders.

On the legislative front, India has yet to pass a comprehensive crypto law, but it has aligned itself with global standards like the Crypto-Asset Reporting Framework (CARF), aimed at improving transparency and international information sharing.

In contrast, Pakistan has taken a more open stance. In March 2025, it launched the Pakistan Crypto Council and appointed social entrepreneur Bilal Bin Saqib as its chief. Binance co-founder Changpeng Zhao was named strategic adviser. By July, Pakistan introduced the Virtual Assets Ordinance and formed the Pakistan Virtual Assets Regulatory Authority (PVARA), a dedicated crypto watchdog responsible for licensing, oversight, and FATF compliance.

While Pakistan aims to attract foreign crypto investment and modernise its financial ecosystem, India remains wary of the security and financial risks linked with decentralised finance, especially given the delicate state of bilateral relations.

Cross-Border Risks and the Push for Global Regulation

The India-Pakistan crypto corridor is particularly vulnerable due to inconsistent regulatory regimes, opaque wallet systems, and heightened geopolitical tension. Experts warn that these gaps could enable bad actors to exploit crypto for terrorism financing, cybercrime, or illicit trade.

The Financial Action Task Force (FATF) has already flagged the increasing use of cryptocurrencies, e-commerce, and encrypted messaging apps by terror groups. Citing incidents like the 2019 Pulwama attack and the 2022 Gorakhnath Temple assault, FATF highlighted how digital tools are reshaping extremist financing networks.

Recent trends show a sharp rise in Telegram-based mule account networks and crypto scams. The anonymity offered by unregulated wallets or privacy-focused crypto tools such as mixers only worsens the risk. In response, India has mandated suspicious transaction reports (STRs) for wallets, privacy coins, and stablecoin operations. Yet critics warn that excessive regulation may stifle innovation and alienate legitimate users.

India’s actions are part of a larger global movement. The US Department of Justice recently dismantled three crypto-powered terror financing operations connected to Hamas, Al-Qaeda, and ISIS. The European Union, through its Anti-Money Laundering Authority (AMLA), has mandated regional licensing and transparency norms. Meanwhile, the US Congress has passed multiple bills including the GENIUS, CLARITY, and Anti-CBDC Acts to bring regulatory clarity without hampering innovation.

Balancing Innovation with Security

India’s probe into Binance and WazirX is not an isolated crackdown, it’s a signal of the country’s shift towards stronger crypto enforcement that aligns with global best practices. The government is working to strike a balance between embracing blockchain innovation and preserving financial sovereignty and national security.

As cryptocurrency adoption rises, so too will the need for more sophisticated regulatory architecture. For India, the coming months may see further tightening of compliance requirements, enhanced inter-agency collaboration, and possibly, the long-awaited introduction of a comprehensive digital assets law.

In the meantime, platforms like Binance and WazirX must demonstrate unwavering transparency and resilience to restore user trust and continue operating within India’s maturing crypto ecosystem.