Date: 13/03/2023

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources; Financial Sector Reforms, Digital Trade.

Key Phrases: Regulated Entities, Virtual digital Asset, Cryptocurrencies, PMLA, Money Laundering, Regulatory Framework, Enforcement Directorate, Financial Inclusion.

Context:

• Recently, the Finance Ministry has tweaked the anti-money laundering law by bringing cryptocurrencies and other virtual digital assets trade under the ambit.

Key Highlights:

• As per the notification following activities will fall under the PMLA.
  • 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; and
  • Participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.
• This means that exchanges, custodians, wallet providers, among others in crypto-related trade will fall under the Prevention of Money Laundering Act.
• The ministry also modified the definition of ownership in virtual assets.
  • In regards to ownership, the ministry directed that any individual or group who holds about 10% ownership in the client of a 'reporting entity' will be seen as the beneficial owner as against the earlier threshold of 25 ownership.

Virtual Digital Asset:

• As per Section 2(47A) of Income Tax Act 1961, the term “Virtual Digital Asset (VDA)” means,-
  1. any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
  2. a non-fungible token or any other token of similar nature, by whatever name called;
  3. any other digital asset, as the Central Government may, by notification in the Official Gazette specify.

Need for Tightened Legislative grip on Digital Trade:

• For a little more than a decade, cryptocurrencies, non-fungible tokens (NFT) and other digital assets enjoyed a regulation-free environment.
• But, in the past couple of years, as the use of digital assets has gone mainstream, regulators have turned hawkish.
• According to cryptocurrency price-tracking site CoinMarketCap dot com, the value of all existing cryptocurrency is about $804 billion as of January 3, 2023.
  • That is about twice the GDP of Singapore in 2021.
• In India, according to a survey conducted by crypto exchange KuCoin, over 10 crore Indians have invested in cryptocurrencies.
• According to a report by blockchain analytics firm Chainalysis, illegal use of cryptocurrencies hit a record $20.1 billion last year.
  • Transactions associated with sanctioned entities jumped over 1,00,000-fold, making up 44% of last year’s illegal activity.

Impacts of this Move on Crypto:

• The gazette notification by the Ministry brings cryptocurrency transactions within the ambit of PMLA.
  • This means that Indian crypto exchanges will have to report any suspicious activity related to buying or selling of cryptocurrency to the Financial Intelligence Unit – India (FIU-IND).
  • The FIU-IND is responsible for receiving, processing, analyzing, and disseminating information related to suspicious financial transactions to law enforcement agencies and overseas FIUs.
• In its analysis, if the FIU-IND finds wrongdoing, it will alert the enforcement directorate (ED).
  • Under Section 5 and 8(4) of the Act, the ED has discretionary powers to search and seize suspected property without any judicial permission.

Regulation in other Countries:

• According to PwC’s ‘Global Crypto Regulations Report 2023’, a large proportion of countries are at various stages of drafting regulations around crypto.
• Most countries have already brought digital assets under anti-money laundering laws.
  • Singapore, Japan, Switzerland, and Malaysia have legislations on regulatory framework.
  • The U.S., U.K., Australia, and Canada have initiated plans on regulating.
  • So far, China, Qatar, and Saudi Arabia have issued a blanket ban on cryptocurrency.
• The EU is also preparing a cross-jurisdictional regulatory and supervisory framework for crypto-assets.
  • The framework seeks to provide legal clarity, consumer and investor protection, and market integrity while promoting innovation in digital assets.

Conclusion:

• While the Centre’s decision to add the PMLA monitoring requirements has been interpreted by the crypto assets sector as moves towards regulating rather than proscribing it, the RBI’s consistent advocacy for a ban needs to be seriously weighed before any decision is taken on the fate of the long-delayed draft legislation on virtual assets.

Source: The Hindu

Mains Question:

Q. What can be the possible implications of bringing the VDA trade under the PMLA? Also, analyze the provisions of other countries for digital trade. (250 Words).