Why Indian Crypto Users Face Bank Account Freezes?

Many people in India who use crypto are finding their bank accounts frozen. This often happens without any warning. In this blog, you will learn why this is happening and how to keep your account safe.

What happens when your account is frozen?

A bank account freeze is a broad term that can refer to one or more actions, such as blocking withdrawals, preventing transfers, or restricting specific transactions.

The bank might block you from withdrawing money, prevent you from transferring funds, or limit other specific actions like making payments, depending on the reason for the freeze. 

Why do bank accounts get frozen?

A bank freeze refers to a situation where a bank account is restricted, preventing the account holder from accessing or transacting with the funds in the account. This can occur due to legal, regulatory, or administrative reasons, often to protect the account, comply with court orders, or prevent fraudulent activities.

Types of Bank Freeze in India:

1. Judicial Freeze:
   • Imposed by a court order or legal authority (e.g., due to debt recovery, tax evasion, or criminal investigations).
   • Example: Attachment of an account by a court for unpaid loans or taxes.
2. Regulatory Freeze:
   • Initiated by regulatory bodies like the Reserve Bank of India (RBI), the Income Tax Department, or the Enforcement Directorate (ED).
   • Common in cases of suspected money laundering, fraud, or non-compliance with KYC norms.
   • Example: Freezing accounts linked to financial scams or terrorist financing.
3. Administrative Freeze:
   • Imposed by the bank itself due to internal policies or issues like incomplete KYC, dormant accounts, or suspicious transactions.
   • Example: Freezing an account if KYC documents are not updated within the stipulated time.
4. Lien-Based Freeze:
   • The bank places a lien on the account, restricting access to a specific amount due to unpaid dues (e.g., loan defaults or credit card payments).
   • Example: Freezing a portion of the account balance to recover outstanding loan EMIs.

Each type of freeze has specific procedures for resolution, often requiring the account holder to comply with legal or bank requirements to lift the restriction.

Account freezes among crypto users in India are not uncommon. To  ensure financial security, prevent illegal activities like fraud and money laundering, banks monitor unusual transactions such as

• large or unexpected transfers
• frequent or rapid transfers
• unexplained deposits
• transactions involving high-risk countries
• inconsistent patterns
• transfers involving cryptocurrencies.

Bank accounts of Indian crypto users are getting frozen mainly because of suspicion of illegal activity or missing KYC rules.  

Different Types of Bank Account Freezes

There are different types of account freezes that can be imposed by banks or authorities, each with specific implications. Here are the main types:

1. Debit Freeze

This is the most common type of freeze, where all outgoing transactions (withdrawals, transfers, payments) are blocked, but deposits can still be made. The funds remain in the account, but you can’t use them until the freeze is lifted.

2. Credit Freeze

In some cases, the bank may restrict your ability to receive credits (deposits), though this is less common than a debit freeze. It limits how much money can be added to your account.

3. Full Account Freeze

A full freeze completely blocks all transactions, both incoming and outgoing. The account becomes completely inactive until the freeze is resolved or lifted.

4. Conditional Freeze

Sometimes, a bank may place a freeze on an account conditionally, meaning only certain types of transactions are restricted. This could involve blocking large or suspicious transactions while allowing routine account activities.

5. Lien Marking

A lien is a legal claim or hold on your account by a bank or authority, often due to unpaid loans, taxes, or other obligations. It doesn’t freeze the account entirely, but restricts access to a specific amount until the dues are cleared.

How to Avoid Account Freezes?

While there’s no foolproof way to guarantee your account won’t be frozen, and this is largely due to regulatory uncertainty, here are some steps you can take to minimize the risk:

• Complete Your KYC: Ensure your bank account and crypto exchange accounts have undergone full KYC verification. Provide accurate and up-to-date information.
  Mudrex has an easy KYC process to be user-friendly and efficient, as highlighted in this blog about driving innovation in KYC compliance.
• Use Reputable Exchanges: Transact through well-established and compliant crypto exchanges. Avoid using obscure or unregulated platforms.
• Be Cautious with P2P Transactions: Be extra cautious when engaging in P2P transactions. Verify the identity of the counterparty whenever possible, and keep records of all transactions. Be aware that P2P transactions, especially international ones, carry a higher risk.
• Transactions outside crypto platforms:  Users should be cautious when receiving funds even outside a crypto platform; make sure the funds you are receiving are from genuine sources.
  
  P2P crypto transactions become especially risky when the counterparty is unknowingly involved in illicit activities or holds “tainted” funds. You could end up receiving crypto or fiat that’s linked to money laundering, scams, or other illegal sources. If that happens, authorities or your bank may flag your account as part of a suspicious transaction chain, even if you were unaware.
  
• Maintain Transaction Records: Keep detailed records of all your crypto transactions, including dates, amounts, and counterparty information. This documentation can be crucial if you need to explain your transactions to your bank.
• Avoid Large, Frequent Transactions: If possible, avoid making unusually large or frequent crypto-related transactions that could trigger suspicion.
• Communicate with Your Bank: If you plan to make significant crypto transactions, consider informing your bank beforehand. This can help prevent misunderstandings and potential account freezes.
• Diversify Your Banking: Consider using multiple bank accounts. This way, if one account is frozen, you’ll still have access to your funds through another.
• Stay Updated on Regulations: Keep yourself informed about the latest regulations and guidelines related to cryptocurrency in India. This will help you ensure that you’re complying with all the rules.
• Seek Professional Advice: If you’re unsure about any aspect of crypto transactions or banking regulations, consult with a financial advisor or legal expert.

What to Do If Your Account Is Frozen

If your account is frozen, here’s what you should do:

1. Contact Your Bank Immediately
   Reach out to your bank’s customer service to find out why your account was frozen. They will provide details about the situation and the steps needed to resolve it. Ask them to share all the relevant information regarding the debit freeze on your account. Info like NCRP Acknowledgement Number of the complaint, name of the concerned Police Station and Investigating Officer, UTR of the dispute transaction.
2. Talk to the concerned police Station/Investigating Office: Ask the investigating officer to explain how the issue can be resolved, if there are any documents he needs or explanations required.
3. Review Your Transactions
   Check your recent transactions for any unusual activity. If something seems off, you may need to explain or provide evidence that the transactions were legitimate.
4. Complete Any Required Documentation
   If the freeze is due to KYC or compliance issues, make sure to complete the necessary forms or submit identification documents as requested by your bank.
5. Resolve Legal or Tax Issues
   If the freeze is related to a legal or tax matter, contact the relevant authorities and work on resolving the issue. This could include paying outstanding debts or clarifying any disputes.
6. Seek Legal Advice if Necessary
   If you believe the freeze is unjust or linked to a legal dispute, consider consulting a lawyer to understand your rights and options.
7. Follow Up Regularly
   Stay in contact with your bank to track the progress of the investigation or resolution. Persistence can help speed up the process.

What Not to Do if Your Account is Frozen

• Don’t Panic: Staying calm and understanding the situation will help you take the right steps to resolve it.
  
• Don’t Ignore the Bank’s Requests: Failing to respond to the bank’s requests for documents or information can delay the process of unfreezing your account.
  
• Don’t Attempt to Circumvent the Freeze: Trying to transfer money to another account or make withdrawals using other methods can lead to further legal complications.
  
• Don’t Dispute Without Understanding the Reason:  Jumping to conclusions or arguing without knowing the cause of the freeze might delay the resolution process.
  
• Don’t Avoid Legal or Compliance Issues: Ignoring potential legal or tax problems can lead to more serious consequences. Addressing the underlying issues is essential.

Account Freezes and India’s Crypto Regulatory Landscape

As of early 2025, cryptocurrencies are not illegal in India, but they remain unregulated in the sense that they are not recognized as legal tender, nor do they have a specific legal classification as a financial instrument. Despite the Supreme Court of India overturning the Reserve Bank of India’s (RBI) 2018 banking ban, significant regulatory ambiguity persists. 

This uncertainty compels banks, guided by the RBI’s historical caution and stringent directives on risk management, to adopt a highly cautious stance.

In the absence of clear crypto-specific guidelines, banks rely heavily on existing Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) frameworks, primarily the Prevention of Money Laundering Act, 2002 (PMLA). 

The inherent characteristics of cryptocurrency transactions, particularly the pseudo-anonymity and cross-border nature often associated with Peer-to-Peer (P2P) platforms, frequently trigger banks’ internal monitoring systems and Suspicious Transaction Reports (STRs) filed with the Financial Intelligence Unit (FIU-IND).

Conclusion

While not all freezes stem from wrongdoing, gaps in KYC, unusual transactions, or unreported crypto activity can raise red flags. Being transparent with banks, using regulated platforms, and staying updated on tax and AML norms can go a long way. In a space still finding legal clarity, caution is your strongest safeguard.

At Mudrex, we prioritise compliance from the ground up—so you can invest in crypto with confidence, not confusion. With seamless KYC, strong audit trails, and tax-ready reports, Mudrex takes the guesswork out of staying compliant. Join lakhs of Indian users choosing peace of mind over panic—download Mudrex, the safest and smartest app for Crypto investing and trading and start your crypto journey with confidence.