Money Laundering Laws Will Apply To Cryptocurrency Businesses: Govt.

Money Laundering Laws Will Apply To Cryptocurrency Businesses: Govt.

The rise of cryptocurrencies and digital assets has disrupted the traditional financial system and challenged the way we think about money. While the benefits of these digital assets are numerous, there have been concerns about their potential use for illegal activities, including money laundering and terrorism financing.

In response, the Union Finance Ministry in India has taken a significant step to bring virtual digital assets under the money laundering law. The proposal by the Union Financial Ministry to include virtual digital assets within the money laundering law is intended to increase the reach of taxation and regulation while giving agencies more authority. But the absence of a centralized regulator raises questions.

What Actions Did The Ministry Take?

The government published a notification on March 7 putting cryptocurrency transactions within the Prevention of Money Laundering Act. It outlined the kind of transactions that would be covered by the PMLA.

They are listed below: Exchange between virtual digital assets and fiat money, exchange between two or more types of virtual assets, transfer of virtual assets, storage or management of virtual assets or tools that enable control over virtual assets, involvement in and delivery of financial services associated with a virtual digital asset issuer’s offer and sale.

Why the Move to Bring Cryptocurrency Under the Money Laundering Law?

The action is anticipated to support investigative agencies in taking legal action against cryptocurrency businesses. The Income Tax Department and the Enforcement Directorate have either looked into or are looking into several instances involving companies that conduct bitcoin exchanges and transactions. For example, ED froze the popular WazirX exchange’s bank accounts last year.

The move to bring cryptocurrencies under the money laundering law aims to widen the taxation and regulatory net and give teeth to agencies. The action taken by the government is a cornerstone of its larger initiatives to fight money laundering, terrorism financing, and other illegal acts. The inclusion of virtual digital assets under the Prevention of Money Laundering Act (PMLA) will allow regulators to monitor and investigate suspicious transactions.

Currently, cryptocurrencies operate in a regulatory grey area, and the lack of a central regulator makes it challenging to track and trace transactions. Bringing virtual digital assets under the money laundering law will provide regulatory clarity and bring cryptocurrency businesses under the purview of financial regulators.

Challenges of Regulating Cryptocurrencies

One of the main challenges of regulating cryptocurrencies is the lack of a central authority. Cryptocurrencies are decentralized, and there is no central bank or regulatory body that oversees their operation. This decentralized structure makes it challenging to monitor and regulate transactions effectively. It also makes it easy for criminals to exploit the system and use cryptocurrencies for illicit activities.

Another challenge is the anonymity of transactions. Cryptocurrency transactions are anonymous, unlike traditional banking systems, where transactions are linked to an individual or organization. This anonymity makes it difficult to track transactions and identify individuals involved in illegal activities.

Concerns Over the Lack of a Central Regulator

Despite the move to bring cryptocurrencies under the money laundering law, concerns remain over the lack of a central regulator. The absence of a central authority makes it difficult to enforce regulations and ensure compliance. It also raises concerns about the effectiveness of regulations in preventing illegal activities.

In the absence of a central regulator, it is crucial to establish clear guidelines and regulations for cryptocurrency businesses. These guidelines should address issues such as Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. They should also include measures to ensure the security of digital assets and protect consumers from fraud.

What Are the Laws Governing Cryptocurrency in India?

Even while the government included a tax on cryptocurrencies in the Union Budget last year, it did not move forward with establishing laws. A court judgement earlier invalidated a prohibition that the Central Bank of India had recommended.

Finance Minister Nirmala Sitharaman informed Parliament in July of last year that “international coordination” would be required for any successful regulation or prohibition of cryptocurrencies to address the RBI’s concerns.

Starting in April 2022, earnings from cryptocurrency transactions will be subject to a 30% income tax in India. Regulations governing the source-deducted 1% tax on cryptocurrencies became effective in July 2022.

How Does the Industry Perceive the Notice?

The bitcoin sector has generally praised the decision in the public sphere. Yet, there are worries inside that the notification does not provide businesses enough time to follow the new requirements. The business sector is also worried that crypto companies may have to deal directly with the ED and other law enforcement organizations in the absence of a central regulator.

Sumit Gupta, co-founder and CEO of cryptocurrency exchange CoinDCX, said: “Slowly but surely, we are moving towards a regulated crypto environment. “Under the PMLA, entities like CoinDCX are now legally compelled to do additional due diligence. We have been looking for a mechanism to communicate data with the FIU-IND for some time; thus, the opening of this route makes us very happy. My colleagues and I are still examining the small print, such as the transfer of VDAs’ inclusion.

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

However, he added that enforcement agencies might directly use this provision in the absence of regulators. He continued that the VDA exchanges have relied on best practices to ensure that PMLA criteria are met, “in contrast to banks, where there are authorities that have specified rules to comply with.

The move to bring cryptocurrencies under the money laundering law is a significant step towards regulating the digital asset market. It will provide clarity and bring cryptocurrency businesses under the purview of financial regulators.

However, the lack of a central regulator remains a concern, and it is crucial to establish clear guidelines and regulations to ensure compliance and protect consumers. The regulation of cryptocurrencies is a complex issue, and it will require collaboration between governments, financial institutions, and industry experts to develop effective regulatory frameworks.

Edited by Prakriti Arora