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India’s booming fintech sector, fueled by record-breaking remittances from its global diaspora reaching approximately $135.46 billion, masks a more intricate reality. This complex landscape involves established customs, emerging technologies, and international inconsistencies, particularly in financial interactions with the Gulf Cooperation Council (GCC) nations. While the Indian government promotes the worldwide use of its Unified Payments Interface (UPI) and celebrates fast remittance channels with countries like the UAE and Saudi Arabia, a less visible economy persists. Traditional, unofficial money transfer methods like hawala, alongside unregistered digital currency transactions and physical cash transfers, continue to be heavily used along the India-Gulf remittance routes.
Without a well-defined, international financial framework that includes consistent regulations, shared digital infrastructure, and strong safeguards against money laundering, India risks building its fintech advancements on an unstable foundation.
The implications extend beyond lost income or unclear data. A robust, international financial structure is essential, demanding harmonized regulations, a collaborative digital framework, and effective anti-money laundering measures. Otherwise, India could see its fintech innovations undermined. The increasing digitization of finance necessitates a parallel strengthening of digital governance.
The Financial Link Between India and the Gulf
India and the Gulf region share significant financial connections. Over nine million Indian citizens reside in GCC countries, annually remitting more than $125 billion back to India. States such as Kerala and Uttar Pradesh are major contributors, with these funds being vital for local economies, land acquisition, weddings, educational expenses, and even political support.
India has recently made efforts to digitize and formalize these financial inflows. The UPI system, recognized globally for its real-time and low-cost transaction capabilities, is being promoted as a tool for financial diplomacy. In 2024, UPI became operational in the UAE, allowing Indian travelers to make payments at over 60,000 retail locations. India has also entered into agreements to connect UPI with Oman’s instant payment network and is exploring similar collaborations with Bahrain and Saudi Arabia.
Hawala 2.0 and Cryptocurrency Alternatives
Despite technological advancements, traditional informal money transfer networks like hawala remain significant. The reasons are varied: hawala provides anonymity, avoids tax scrutiny, often offers better exchange rates, and is built on established trust networks. For many low-income migrant workers, especially those without proper documentation or on temporary visas, these methods are quicker, less daunting, and based on personal connections rather than official processes.
While the Financial Intelligence Unit (FIU) has issued warnings to international cryptocurrency exchanges and tightened domestic regulations under the Prevention of Money Laundering Act (PMLA), consistent enforcement remains a challenge.
Alarmingly, the fintech revolution has given hawala operations a digital upgrade. Encrypted messaging applications like Signal and Telegram are used to facilitate covert hawala transactions. Operators are known to use end-to-end encrypted WhatsApp conversations, inaccessible to authorities, for confirmations and QR codes for simulated payment screenshots. Certain hawala users now utilize stablecoins (such as USDT) to transfer funds discreetly, leveraging global digital currency exchanges in Dubai and Mumbai. Even prepaid cards and online gaming wallets have become pathways for disguised fund transfers. Regulatory agencies in both regions are struggling to keep up.
Dubai, which aims to become a leading digital currency hub, maintains a relatively relaxed regulatory stance despite establishing the Virtual Assets Regulatory Authority (VARA). Indian authorities have also faced challenges in ensuring effective compliance. While the Financial Intelligence Unit (FIU) has issued notices to offshore crypto exchanges and tightened domestic regulations under the Prevention of Money Laundering Act (PMLA), enforcement remains inconsistent. This situation creates a transnational digital finance grey area with limited oversight, making it vulnerable to activities ranging from terrorist financing to capital flight.
Limitations of the Existing System
To date, India’s fintech diplomacy has been primarily celebratory and focused on technology, rather than being risk-aware and driven by regulatory concerns. While UPI integration is a significant achievement, it is mainly promoted as a measure of soft power and convenience for tourists, not as a vital component of financial security. There is limited public discussion about the interaction of these corridors with illegal financial activities. Fintech is still seen as a driver of growth and inclusion, rather than a potential area of geopolitical risk. While the RBI’s regulatory sandbox framework indicates an effort to monitor innovation under supervision, it remains primarily focused on fintech growth rather than mitigating security risks. Similarly, recent enforcement actions, including show-cause notices, fines, URL blocks, and FEMA-/AML investigations into crypto platforms like Binance and WazirX, demonstrate a reactive approach responding to compliance failures rather than proactive policymaking focused on corridor risk.
Fintech is still perceived as an engine of growth and inclusion, rather than a domain of geopolitical risk.
India has signed multiple Memoranda of Understanding (MoUs) with Gulf countries regarding financial collaboration, but these remain broad. Anti-money laundering (AML) mechanisms are not harmonized. Know Your Customer (KYC) protocols vary considerably across jurisdictions, particularly in smaller GCC nations like Bahrain or Kuwait. Migrant workers often fall outside the scope of these systems, where formal digital identification is inconsistent and poorly enforced.
Moreover, cooperation on digital currency regulation is in its early stages. Countries such as the UAE have developed their regulatory sandboxes, but there is no interoperable oversight or shared reporting mechanisms with India. There is also no agreed-upon protocol for identifying suspicious cross-border transactions in real time, let alone freezing digital assets.
Policy Recommendations: Creating a Collaborative Digital Financial Structure
To address these challenges, India needs to shift from simply promoting fintech to a more pragmatic approach. This involves developing a shared regulatory and infrastructural framework with key Gulf partners.
- Establish a Gulf-India Digital Financial Security Taskforce:
A collaborative task force, including central banks, fintech regulators, financial intelligence units, and cybercrime agencies, should be established with countries such as the UAE and Saudi Arabia, led by the Financial Intelligence Unit (FIU) and National Payments Corporation of India. Its objective would be to identify risk areas in digital transfers, propose aligned KYC standards, and monitor high-risk patterns in digital currency and remittance flows. Such a task force could also coordinate responses to cyber threats involving cross-border payment systems.
- Create a Shared AML Registry for Migrant-Sending Corridors:
Similar to how the FATF encourages regional AML frameworks, India and Gulf states should develop 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 digital currency wallet addresses, suspicious exchange accounts, and blacklisted hawala operators. Interoperability with INTERPOL and FATF platforms would enhance its effectiveness.
- Negotiate Bilateral Digital Currency Compliance Agreements Based on Domestic Regulations:
India should first establish a comprehensive digital currency regulatory framework, beyond current PMLA provisions, before pursuing bilateral compliance agreements 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 digital currency ecosystem, with safeguards to prevent overreach, particularly in remittance corridors used by migrant workers.
- Pilot Digital Remittance Corridors with Key Checkpoint Monitoring:
India and key Gulf states could jointly pilot a digital remittance corridor that prioritizes 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.
Conclusion
India is at a crucial point in its financial diplomacy with the Gulf. The potential of digital payment corridors is significant: faster remittances, lower transaction costs, improved financial inclusion, and geopolitical influence. However, if these corridors remain under-regulated and unaware of informal flows, they risk becoming high-speed channels for 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 simply publicizing the global expansion of UPI. True fintech leadership demands a stable, secure, and collaboratively managed structure – one that connects not just platforms, but also regulatory systems, policy perspectives, and institutional responsibility. The future of financial security between the Gulf and India will be shaped not only by engineers or diplomats, but by the necessary convergence of both.
This future needs to be inclusive without being naive, digital without being careless, and fast without being fragile. In a world where money travels faster than the law, India must ensure that trust moves just as quickly. Only then can its fintech diplomacy become a lasting cornerstone of national security and regional cooperation.
Kriti Chhibber is a Research Intern at the Observer Research Foundation.
[1] Hawala, derived from an Arabic term for transfer or trust, represents an informal method of money transfer that bypasses the physical movement of funds. It relies on a network of money lenders, known as hawaladars, and is commonly employed in the Middle East, Africa, and the Indian subcontinent, operating outside traditional banking systems.
[2] Tether, identified by the currency codes USD₮ and USDT, is a stablecoin cryptocurrency introduced by Tether Limited Inc. in 2014.
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