The Indian government’s recent decision to bring virtual digital assets under the jurisdiction of the Prevention of Money Laundering Act, 2002 (PMLA) has generated a lot of buzz in the cryptocurrency world. This move is aimed at regulating and monitoring India’s fast-growing but unregulated crypto space, widening the taxation and regulatory net, and bringing more transparency to the industry. But realistically speaking, what exactly does this mean for crypto users? How will the move affect the cryptocurrency industry?
What Is PMLA, And What Does It Mean For Crypto Investors?
The Prevention of Money Laundering Act, 2002 (PMLA) is a law aimed at combating money laundering and other financial crimes. Its primary aim is to prevent and control money laundering, terrorist financing, and other financial crimes by imposing stringent regulatory measures on financial institutions. The law requires all financial institutions, including banks, to implement rigorous know-your-customer (KYC) procedures, report suspicious transactions, and maintain proper records of all trades.
With the recent inclusion of virtual digital assets (VDAs) under the PMLA, transactions involving the exchange, transfer, and safekeeping of crypto assets now fall under the ambit of the law. The Finance Ministry of India issued a gazette notification on March 7, 2023, bringing VDAs under money laundering provisions.
As per the notification, VDAs will now be considered “reporting entities” under the PMLA, which means that any person carrying on VDA-related activities shall maintain records and verify the identity of their clients and users as per the rules prescribed by the law. This includes activities such as exchanging VDAs for fiat currencies, exchanging between one or more forms of VDAs, transferring VDAs, and safekeeping or administering VDAs or instruments enabling control over VDAs.
The notification also mandates that reporting entities maintain records of the nature and value of transactions, parties involved in transactions, the date and place of transactions, and any other information relevant to the identification and prevention of money laundering. The Director appointed under sub-section (1) of section 49 of PMLA is empowered to issue guidelines for implementation and compliance with these provisions.
What Activities Are Considered Virtual Digital Asset Transactions Under PMLA?
The inclusion of virtual digital assets (VDAs) under the Prevention of Money Laundering Act (PMLA) in India brings more transparency to the crypto industry, widening the regulatory net and making it more accountable. The Finance Ministry of India’s notification mandates that certain activities involving VDAs will now fall under the purview of the PMLA. These activities include:
- Exchange between VDAs and fiat currencies: The buying and selling of VDAs for fiat currency or vice versa are now subject to PMLA regulations. As a result, crypto exchanges and intermediaries must collect and maintain personal information about the buyer or seller, the nature and value of the transaction, and other relevant information.
- Exchange between one or more forms of VDAs: Trading VDAs for other VDAs, such as Bitcoin for Ethereum, is now covered by the PMLA. Crypto exchanges and intermediaries must collect and maintain personal information about the parties involved, the nature and value of the transaction, and other relevant information.
- Transfer of VDAs: Sending or receiving VDAs is now covered by the PMLA. Crypto exchanges and intermediaries must collect and maintain personal information about the sender or receiver, the nature and value of the transaction, and other relevant information.
- Safekeeping or administration of VDAs or instruments enabling control over VDAs: The storage and management of VDAs are now covered by the PMLA. Crypto exchanges and intermediaries must collect and maintain personal information about the owner or controller of the VDAs, the nature and value of the transaction, and other relevant information.
- Provision of financial services related to the offer and sale of VDAs: Any financial services that facilitate the offer and sale of VDAs, such as Initial Coin Offerings (ICOs) or Security Token Offerings (STOs), are now covered by the PMLA. Crypto exchanges and intermediaries must collect and maintain personal information about the issuer, the nature and value of the transaction, and other relevant information.
How Does PMLA Affect Crypto Exchanges And Intermediaries?
Crypto exchanges and intermediaries are essential components of the crypto industry, as they serve as platforms that facilitate buying, selling, trading, and storing of VDAs. They provide liquidity, transparency, and accessibility to crypto markets, making it easier for investors to participate in the market. However, they are also vulnerable to fraudulent activities, including money laundering, terrorist financing, and tax evasion.
The recent PMLA notification has significant implications for crypto exchanges and intermediaries in India. Under the notification, crypto exchanges and intermediaries are now considered reporting entities and must comply with KYC and AML measures as per the PMLA rules. This means that they must collect personal information, such as name, address, PAN number, and Aadhaar number, from their customers and verify their identity using documents such as passport and driving license.
The notification also requires crypto exchanges and intermediaries to report any suspicious or high-value transactions to the authorities per the prescribed thresholds. They must maintain records of transactions that involve the exchange, transfer, and safekeeping of crypto assets, including the nature and value of transactions, the parties involved, the date and place of transactions, and any other information relevant to the identification and prevention of money laundering.
These compliance requirements may increase their operational costs and administrative burden. They may also face challenges in obtaining banking services as many banks are reluctant to deal with crypto-related businesses due to regulatory uncertainty. The lack of clarity and regulatory oversight in the past has made banks and other financial institutions hesitant to support the crypto industry.
How Does PMLA Affect Crypto Investors And Users?
The notification issued by the Finance Ministry of India brings about changes in the compliance requirements for crypto investors and users. The PMLA notification requires crypto investors and users to provide their personal information and documents while opening accounts or conducting transactions. The requirement for KYC norms and AML measures aims to prevent money laundering, terrorism financing, and other financial crimes associated with virtual digital assets.
However, this increased disclosure requirement has an impact on the anonymity of crypto investors and users, often cited as an advantage of using cryptocurrencies. The anonymity feature of cryptocurrencies has made it attractive to investors and users who want to keep their financial transactions private. With the implementation of the PMLA rules, crypto investors and users must now comply with the KYC norms and provide their personal information, which may compromise their anonymity.
Moreover, the PMLA notification will also affect the tax liabilities of crypto investors and users. They will now have to pay taxes on their gains from VDA transactions as per their income tax slab rates. This means that they will have to declare their VDA investments while filing their income tax returns.
How Does PMLA Affect Regulators?
Regulators are government agencies that oversee various aspects of financial markets, including the Reserve Bank of India, Securities Exchange Board of India, Enforcement Directorate, and Income Tax Department. The recent inclusion of VDAs under the PMLA now gives these regulators more authority and responsibility over regulating and monitoring the crypto space, primarily outside their purview.
The Reserve Bank of India (RBI) has been quite vocal about its concerns with cryptocurrencies, citing risks related to money laundering, terrorism financing, and consumer protection. In 2018, the RBI issued a circular that effectively banned banks from dealing with crypto-related businesses, including exchanges and traders. However, the circular was set aside by the Supreme Court in 2020, and since then, the RBI has been exploring ways to regulate cryptocurrencies effectively.
With the inclusion of VDAs under the PMLA, the RBI now has more tools at its disposal to regulate the industry. It can monitor and regulate the activities of crypto exchanges and intermediaries, who are now required to comply with KYC and AML measures as per the PMLA rules. This includes collecting personal information such as name, address, PAN number, and Aadhaar number from their customers and verifying their identity using documents such as passport, driving license, etc.
The Securities Exchange Board of India (SEBI) is another regulator that may benefit from the PMLA’s inclusion of VDAs. SEBI oversees the securities market in India and may now have more oversight over Initial Coin Offerings (ICOs) and other VDA-related securities offerings. SEBI can also use the PMLA to regulate VDA derivatives and other financial instruments, as well as to investigate and take enforcement action against VDA-related fraud and manipulation.
The Enforcement Directorate (ED) is responsible for enforcing economic laws and fighting financial crimes in India. The inclusion of VDAs under the PMLA now gives the ED more power to investigate and prosecute money laundering and other financial crimes linked to cryptocurrencies. The ED can now request records about VDA transactions from crypto exchanges and intermediaries, which will be helpful in their investigations.
Finally, the Income Tax Department may use the PMLA to monitor and tax gains made from cryptocurrency transactions. In 2018, the department introduced a 30% income tax on gains made from cryptocurrencies, and in 2020, it introduced rules regarding 1% tax deducted at source on cryptocurrency. The inclusion of VDAs under the PMLA now gives the department more oversight over cryptocurrency transactions and may help it to ensure that taxes are being paid on gains made from VDA transactions.
Potential Impact Of The Notification On The Industry
The Prevention of Money Laundering Act, 2002 (PMLA) has far-reaching implications for the Indian crypto industry and its stakeholders. The move is aimed at regulating the fast-growing but unregulated crypto space and bringing more transparency to the industry. However, it also raises concerns about the broad ambit of the new notification and its enforcement in the absence of a direct regulator.
One of the potential impacts of the notification is the deterrent effect it may have on the sector. Some investors may relocate their operations to other, less-regulated jurisdictions due to greater scrutiny and regulation. This may result in a decline in the volume of crypto transactions on Indian exchanges and a loss of business for crypto intermediaries and service providers.
Furthermore, the compliance requirements under the PMLA may increase the operational costs and administrative burden for crypto exchanges and intermediaries. They may also face difficulty in obtaining banking services as many banks are reluctant to deal with crypto-related businesses due to regulatory uncertainty. This may result in a decline in the number of crypto exchanges and intermediaries operating in India.
Final thoughts
PMLA is a significant step towards regulating the Indian crypto industry. The move widens the taxation and regulatory net and brings more transparency to the industry. However, the broad ambit of the notification and its enforcement in the absence of a direct regulator raises concerns about investor privacy and security. With the right approach and collaboration between industry players and regulators, the Indian crypto industry can achieve sustainable growth and become a key player in the global crypto market.
