Finance Ministry brings crypto assets under Prevention of Money Laundering Act: What are the implications?

On March 7, the government issued a notification bringing transactions involving crypto assets under the Prevention of Money Laundering Act. It laid out the nature of transactions to be covered under PMLA. These are as follows: Exchange between virtual digital assets and fiat currencies; exchange between one or more forms of virtual digital assets; transfer of virtual digital assets; safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.

Why the move?

The measure is expected to aid investigative agencies in carrying out action against crypto firms. The Enforcement Directorate and Income Tax Department have either probed or are probing several cases against companies running cryptocurrency exchanges and transactions. ED, for instance, froze the bank balances of the popular WazirX exchange last year.

What is the legal status of crypto in India?

In the Union Budget last year, even though the government brought in a tax for cryptocurrencies, it did not proceed with framing regulations. Earlier, the Reserve Bank of India had proposed a ban that was set aside by a court order. In July last year, flagging the RBI’s concerns, Finance Minister Nirmala Sitharaman told Parliament that “international collaboration” would be needed for any effective regulation or ban on cryptocurrency.

From April 2022, India introduced a 30 per cent income tax on gains made from cryptocurrencies. In July 2022, rules regarding 1 per cent tax deducted at source on cryptocurrency came into effect.

How is the notification being viewed by the industry?

Publicly, the cryptocurrency industry has largely welcomed the move. Internally, however, there are concerns that the notification does not offer entities time to adhere to the fresh norms. The industry is also concerned that in the absence of a central regulator, crypto entities could end up dealing directly with enforcement agencies like the ED.

“Slowly but surely, we are moving towards a regulated crypto ecosystem,” Sumit Gupta, co-founder and CEO of cryptocurrency exchange CoinDCX. “Entities such as CoinDCX are now required by law to conduct due diligence and enhanced due diligence under the PMLA… We have been looking for a way to share data with the FIU-IND for sometime now, and are now delighted that this channel has been opened. My team and I are still looking at the fine print, such as the inclusion of the transfer of VDAs.”

Mohnish Wadhwa, CEO of a business consulting firm CapDeck Advisors, said, “With this, VDA entities now covered as a reporting entity, which means exchanges, custodians or administrators of VDAs handling customer funds will have to take care of PMLA laws as much as banks do and report suspicious transactions.”

However, he added that in the absence of regulators, enforcement agencies could directly take recourse of this amendment. “Unlike banks, where there are regulators who have specified rules to comply with, for being compliant with PMLA requirements, the VDA exchanges have been relying on best practices to make sure these are taken care of,” he added.