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India must secure its digital remittance corridors with the Gulf by aligning fintech innovation with robust cross-border regulation and governance
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As the remittances that the Indian diaspora sends home reach a record high of US$135.46 billion, the shimmering surface of India’s fintech triumphalism exposes a complex terrain of old habits, new technologies, and cross-border contradictions running beneath it. Nowhere is this more apparent than in its economic entanglement with the Gulf Cooperation Council (GCC). As the Modi government champions the internationalisation of UPI and boasts of real-time remittance pipelines with countries like the United Arab Emirates (UAE) and Saudi Arabia, the shadow economy continues to hum beneath. Informal financial channels like hawala systems[1], unregistered cryptocurrency transfers, and couriered cash still dominate large swathes of the India-Gulf remittance corridors.
Without a coherent, cross-border financial architecture that includes regulatory convergence, shared digital infrastructure, and robust anti-money laundering protocols, India risks building fintech castles on sand.
What is at stake is more than lost revenue or data opacity. Without a coherent, cross-border financial architecture that includes regulatory convergence, shared digital infrastructure, and robust anti-money laundering protocols, India risks building fintech castles on sand. A proportional fortification of digital governance must match the digitisation of finance.
India and the Gulf are linked extensively by liquid capital. Over 9 million Indians reside in the GCC states, sending back over US$125 billion in annual remittances. States like Kerala and Uttar Pradesh are major sources, which serve as a lifeline for local economies, land purchases, marriages, education, and even political patronage.
In recent years, India has attempted to digitise and formalise these inflows. The Unified Payments Interface (UPI), lauded globally for its real-time, zero-cost transaction capabilities, has been positioned as a tool of financial diplomacy. In 2024, UPI went live in the UAE, where Indian travellers can now pay at over 60,000 merchant locations. India has signed agreements to link UPI with Oman’s instant payment network and is in ongoing discussions with Bahrain and Saudi Arabia.
Despite these technological advancements, traditional informal money transfer systems like hawala retain its ground. The reasons are manifold; hawala offers anonymity, circumvents tax scrutiny, often provides better exchange rates, and relies on deeply embedded trust networks. For many low-income migrants, especially undocumented ones or those on temporary visit visas, these channels are faster, less intimidating, and rooted in personal relationships rather than institutional bureaucracy.
While the Financial Intelligence Unit (FIU) has issued notices to offshore crypto exchanges and tightened domestic rules under the Prevention of Money Laundering Act (PMLA), enforcement remains inconsistent.
Worse still, the fintech revolution has given hawala operations a digital facelift. Encrypted messaging apps like Signal and Telegram facilitate covert hawala arrangements. Operators are known to use end-to-end encrypted WhatsApp chats, unaccessible to authorities, for confirmations and QR codes for simulated payment screenshots. Some hawala users now use stablecoins (such as USDT)[2] to transfer value under the radar, leveraging global crypto exchanges in Dubai and Mumbai. Even prepaid cards and online gaming wallets have emerged as conduits for disguised fund flows. Regulatory bodies in both regions remain several steps behind.
In Dubai, which aspires to be a global crypto hub, the regulatory environment remains lightly policed despite the establishment of the Virtual Assets Regulatory Authority (VARA). Indian authorities, too, have struggled to enforce meaningful compliance. While the Financial Intelligence Unit (FIU) has issued notices to offshore crypto exchanges and tightened domestic rules under the Prevention of Money Laundering Act (PMLA), enforcement remains inconsistent. This results in a grey zone of transnational digital finance with limited oversight, which is porous to everything from terrorist finance to capital flight.
To date, India’s fintech diplomacy has largely been celebratory and tech-centric, rather than risk-aware and regulatory-driven. UPI integration, while a landmark achievement, is framed primarily as a soft power success and convenience measure for tourists, not as a strategic pillar of financial security. There is little public discourse about how these corridors interact with illicit flows. Fintech is still perceived as an engine of growth and inclusion, rather than a domain of geopolitical risk. While the RBI’s regulatory sandbox framework signals an attempt to monitor innovation under oversight, it remains oriented mainly toward fintech growth rather than mitigating security risks. Similarly, recent enforcement actions, including show‑cause notices, fines (e.g. INR 188 million on Binance, INR3.45 million on KuCoin), URL blocks, and FEMA‑/AML probes into crypto platforms like Binance and WazirX, demonstrate a reactive posture responding to compliance failures rather than proactive corridor‑risk policymaking.
Fintech is still perceived as an engine of growth and inclusion, rather than a domain of geopolitical risk.
India has signed several Memoranda of Understanding (MoUs) with Gulf countries on financial cooperation, but these remain general. Anti-money laundering (AML) mechanisms are not harmonised. Know Your Customer (KYC) protocols differ significantly across jurisdictions, especially in smaller GCC states like Bahrain or Kuwait. Migrant workers often fall into the cracks of these regimes, where formal digital identification remains patchy and inconsistently enforced.
Moreover, bilateral cooperation on crypto regulation is embryonic at best. Countries like the UAE have developed their regulatory sandboxes, but without interoperable oversight or shared reporting mechanisms with India. There is also no agreed-upon protocol for flagging suspicious cross-border transactions in real time, let alone freezing digital assets.
To address these challenges, India must pivot from fintech evangelism to fintech realism. This means crafting a joint regulatory and infrastructural framework with key Gulf partners.
A joint task force comprising central banks, fintech regulators, financial intelligence units, and cybercrime agencies should be set up with countries like the UAE and Saudi Arabia, spearheaded by the Financial Intelligence Unit (FIU) and National Payments Corporation of India. Its mandate would be to identify risk zones in digital transfers, propose aligned KYC norms, and monitor high-risk patterns in crypto and remittance flows. Such a task force could also coordinate responses to cyber threats involving cross-border payment systems.
Much like the FATF pushes regional AML frameworks, India and Gulf states should create a shared database of flagged financial entities and suspicious transaction patterns, specifically tailored to high-volume migrant corridors, led by the FIU. This should include crypto wallet addresses, suspicious exchange accounts, and blacklisted hawala operators. Interoperability with INTERPOL and FATF platforms would amplify its effectiveness.
India should first establish a comprehensive crypto regulatory framework, beyond current PMLA provisions, before pursuing bilateral compliance pacts with Gulf countries. Once domestic rules are in place, India can negotiate agreements focused on wallet blacklisting, data sharing, transaction monitoring, and cross-border enforcement. These should align with global standards, such as the European Markets in Crypto Assets (MiCA). Cooperation should be shaped by each country’s crypto ecosystem, with safeguards to prevent overreach, especially in remittance corridors used by migrant workers.
India and key Gulf states could jointly pilot a digital remittance corridor that prioritises traceability and compliance without compromising user privacy. The corridor should focus on key checkpoints of sender verification, AML screening, and receiver validation, administered by licensed remittance providers and monitored by a joint regulatory task force comprising the FIU, Gulf central banks, and data protection authorities, to ensure compliance with AML norms while safeguarding user data. If successful, the model can be scaled across other South-South migration corridors.
A useful precedent lies in the Singapore–Thailand PayNow–PromptPay linkage, which enables real-time low-value transfers using mobile numbers, with built-in fraud detection and AML compliance overseen by the Monetary Authority of Singapore and the Bank of Thailand. Similarly, sandboxed blockchain pilots between Thai and Singaporean banks have demonstrated how near-instant, traceable transactions can be achieved under regulatory scrutiny.
India stands at a critical juncture in its financial diplomacy with the Gulf. The promise of digital payment corridors is immense: faster remittances, lower transaction costs, improved financial inclusion, and geopolitical influence. But if these corridors remain under-regulated and blind to informal flows, they risk becoming high-speed vectors of illicit finance, data breaches, and geopolitical vulnerability.
True fintech leadership requires a stable, secure, and jointly governed architecture—one that bridges not just platforms, but regulatory regimes, policy mindsets, and institutional accountability.
The time has come for India to move beyond headlines about UPI going global. True fintech leadership requires a stable, secure, and jointly governed architecture—one that bridges not just platforms, but regulatory regimes, policy mindsets, and institutional accountability. The future of Gulf-India financial security will not be built merely by engineers or diplomats, but by the painful but necessary convergence of the two.
This future must be inclusive without being naive, digital without being reckless, and fast without being fragile. In a world where money moves faster than law, India must ensure that trust moves just as swiftly. Only then can its fintech diplomacy mature into a durable pillar of national security and regional cooperation.
Kriti Chhibber is a Research Intern at the Observer Research Foundation.
[1] Hawala, originating from an Arabic term for transfer or trust, is an informal method of transferring money without any money physically moving from one place to another. It is based on a system of money lenders known as hawaladars, which is generally used in the Middle East, Africa, and on the Indian subcontinent outside traditional banking systems.
[2] Tether, often referred to by its currency codes USD₮ and USDT, is a cryptocurrency stablecoin launched by Tether Limited Inc. in 2014.
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Kriti Chhibber is a Research Intern at the Observer Research Foundation. ...
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