the Government of India, by requiring crypto exchanges as well as intermediaries dealing with virtual digital assets (VDAs) to perform KYC of clients and users on various platforms, has taken a gingerly step to follow the money without dirtying its hands.On Tuesday, the Finance Ministry issued a notification specifying that entities dealing in VDAs will henceforth be considered ‘reporting entity’ under the Prevention of Money Laundering Act (PMLA) and related rules.
The ambit of the term ‘reporting entity’ has been enlarged to cover all entities involved in the exchange of VDAs and fiat currencies or transfer of VDAs or safekeeping and administration of VDAs, and participation in financial services related to an issuer’s offer and sale of a VDA for the purpose of the PMLA. Currently, apart from banks and financial institutions, entities engaged in real estate and jewellery sectors as well as casinos are considered ‘reporting entities’ under PMLA.
Every reporting entity is required to maintain a record of all transactions, including the record of all cash transactions of more than Rs 10 lakh. Also, they are required to maintain a record of all series of cash transactions integrally connected to each other, which have been individually valued below Rs 10 lakh, where such series of transactions have taken place within a month and the monthly aggregate exceeds Rs 10 lakh, besides other records.
Although digital currency and assets like non-fungible tokens (NFTs) have gained traction in many parts of the globe over the last couple of years, India did not have, at least till last year, a clear policy on regulating or taxing such asset classes. The breakthrough came in Union Budget 2022-23 that brought a 30 per cent tax on income from transactions in VDAs. Besides, to bring such assets under the tax net, a 1 per cent TDS on transactions in such asset classes above a certain threshold was imposed. Gifts in crypto and digital assets were also taxed.
The Union government and the Reserve Bank of India (RBI), despite their known positions on cryptocurrency, cannot just wish away crypto entities or cut short the journey of cryptocurrencies.The trigger for Tuesday’s notification seems to be the fact that 17 lakh Indian VDA users have switched from domestic centralised VDA exchanges to foreign counterparts since the new tax regime kicked in. A study by a think tank suggests that Indian crypto traders have moved over $ 3.8 billion in trading volume from local exchanges to international crypto platforms after the country’s tax policy came into effect last year.
Noticeably, the draft pieces of legislation on cryptocurrency reflect a shift in the thinking of policymakers. While the previous ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’sought to impose a complete ban on all crypto-related activities, including mining, buying, holding, selling, and dealing; the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 will cover mainly crypto assets used as currency.The new Bill seeks to prohibit all ‘private cryptocurrencies’ in India, while allowing for certain exceptions to promote the underlying technology of cryptocurrency and its uses.
Currently, there is no regulation or any ban on the use of cryptocurrencies in the country. Going by the timeline of official recommendations and rules made concerning the crypto sector, the RBI is more determined than the Centre when it comes to putting curbs on cryptocurrencies. RBI Governor Shaktikanta Das has gone on record that cryptocurrencies “pose a serious threat to any financial system since they are unregulated by central banks”.
The RBI’s fears are not unfounded.Over the past one year, the ED and Income Tax Department have probed at least 10 crypto exchanges for allegedly assisting foreign firms by laundering money via crypto. Investigations unearthed instances of firms approaching the exchanges to buy crypto coins for more than Rs 100 crore and crypto coins being sent to international wallets. In many of these cases, the KYC details collected by the exchanges were found to be dubious. The authorities estimate that the accused firms laundered more than Rs 1,000 crore in the instant loan app case, with most of them having China links. As of January 31, 2023, the Enforcement Directorate has attached Rs 936 crore proceeds of crime and arrested five persons related to cryptocurrency fraud.
Back in 2013, RBI had issued a circular warning the public against the use of virtual currencies. The bank had warned users, holders, and traders of virtual currencies about the potential financial, operational, legal, customer protection, and security-related risks they are exposing themselves to. Since banks continued to allow transactions on cryptocurrency exchanges, RBI released another circular in February 2017 reiterating its concerns over the continued use of virtual coins. Finally, at the end of 2017, a warning was issued by RBI and the Finance Ministry clarifying that virtual currencies “are not a legal tender”.
In April 2018, a committee appointed by the Finance Ministry proposed a draft bill for the regulation of virtual currencies but did not recommend a ban. However, in February 2019 the committee proposed a fresh draft bill that recommended a blanket ban.The RBI subsequently issued an order banning banks from supporting crypto transactions. In March 2020, the Supreme Court lifted the curbs on cryptocurrency imposed by the Reserve Bank of India.
In November 2021, the Standing Committee on Finance concluded, after a meeting with crypto players, that cryptocurrencies should not be banned, but regulated.
Finance MinisterNirmala Sitharaman recently told Parliament that India was discussing with the G-20 member-countries the need to develop a standard operating protocol for regulating crypto assets.
The latest notification seems to be the first step that India has taken in that direction by ensuring that at least the Indian crypto market fits in the local framework of limited compliance. A lot remains to be done by India to help prevent crypto-laced criminal activities such as money laundering and terrorist financing.
