Checks, balances of cryptoverse

In an attempt to introduce financial guardrails in the cryptocurrency space, the Finance Ministry has notified that entities dealing in virtual digital assets (VDA) will now be treated as a reporting entity under the Prevention of Money Laundering Act (PMLA). Crypto exchanges as well as intermediaries that deal with VDA will now be required to perform KYC processing of clients and users of the platform, and report suspicious transactions too. The KYC includes maintaining records of documents proving the identity of clients and beneficial owners, apart from files pertaining to the accounts and business correspondence related to its clients, for a minimum period of five years.

Entities involved in the exchange of VDA and fiat currencies, transfer of VDA, safekeeping and administration of VDA, and in financial services pertaining to an issuer’s offer and sale of a VDA have all been categorised by the government as reporting entities for the purpose of the PMLA. The government has been keen on formulating a regulatory framework on crypto for a while now.

The Centre had hinted at unveiling a bill to regulate crypto in the winter session of the Parliament in 2021. However, the bill did not see the light of the day. Later, during the Budget speech for 2022-23, a 30% tax on income from transactions in VDA was introduced. A 1% TDS (tax deducted at source) on transactions in such asset classes over a certain threshold was also imposed. Apart from this, gifts in the form of crypto and digital assets were also taxed.

The Centre’s response was timely as there was an uptick in ads attracting investments in virtual assets like crypto and NFTs, as well as reports of big ticket investments in crypto during the pandemic. Industry watchers had estimated India to be the nation with the highest number of crypto owners globally — 10.07 crore users. This is thrice as much as the number of crypto owners in the US, which trails behind India at rank 2. The volume of trade vis-a-vis unregulated crypto assets has also seen a surge as the Enforcement Directorate is now probing several cases pertaining to crypto frauds involving exchanges carrying out money laundering activities.

As of January 31, the agency has arrested five individuals and attached ill-gotten assets to the tune of Rs 936 cr. The government is aware of the drawbacks of enforcing a country-specific domestic regulation for crypto, an asset that isn’t limited by physical borders. Effective regulation will require synergy from the international community that must come together to develop an all-encompassing regulatory framework. The intergovernmental Financial Action Task Force has cautioned countries regarding the speed and anonymity with which nefarious operators can trade in VDA. Unfortunately, the uneven adoption of crypto and the policies pertaining to VDA — with some nations moving to regulate them, some banning them altogether and many choosing to leave the system unchecked has created a conducive atmosphere for potential abuse.

India currently holds the G-20 presidency and it had emphasised a few months ago that it would use the opportunity to seek a globally coordinated regulation for crypto assets. RBI has also directed banks, financial institutions, and other intermediaries that it regulates to follow KYC norms for remittances resulting from crypto transactions. Going forward, it will be necessary for the Centre and the RBI to see eye to eye on the matter of virtual assets. It will be crucial in the run-up to the unveiling of the much-anticipated cryptocurrency bill.