Cross-border money laundering has become an activity of serious concern in modern times
Earlier this month, the finance ministry notified that certain activities relating to virtual digital assets (VDAs), including cryptocurrencies, will be brought under the ambit of the Prevention of Money Laundering Act, 2002. Now, service providers in this space, specifically VDA exchanges and wallet operators, need to conduct due diligence activities, including reporting suspicious transactions/ activities related to the sale or purchase of VDAs to the Financial Intelligence Unit– India. The move is seen as a positive step by the Government of India towards the regulation of VDAs.
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Cross-border money laundering has become an activity of serious concern in modern times. The evolution of the global financial system and the introduction of innovative technology has arguably and perhaps unintentionally led to the adoption of new tactics by those wishing to launder money through secretive processes. Reports by Chainalysis (a blockchain analytics company) suggest that around $23.8 billion was laundered through VDAs in 2022 — a staggering 68 per cent rise from the previous year.
The United Nations Office on Drugs and Crime (UNODC) has also flagged misuse of VDAs for money laundering through mechanisms like untraceable tokens and “mixers” that permit the undetected transfer of tokens and has called on the UN member states to combat this menace through regulation.
It is in this spirit that India has extended its PMLA regulations to VDAs. India, which currently holds the presidency of the G20 group, had indicated early that it would make VDA regulation a priority, and has more recently called for global cooperation in fashioning a proper regulatory framework for the sector.
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PMLA regulations will now apply to all VDA exchanges, NFT platforms and wallet operators, thereby casting a wide net over the industry. The definition of “virtual digital assets” is taken from the Income Tax Act, 1961. VDA service providers will now be required to adhere to KYC norms and other reporting standards followed by banks, securities brokers, and other such financial intermediaries — a step that was already being proactively followed by large VDA industry players including exchanges in India. Further, this will empower the Enforcement Directorate to investigate and take enforcement action to weed out bad actors from the industry. Overall, therefore, the move is likely to render this space safer for bona fide users.
This step also indicates the inclination of the Government to move towards a proper regulatory framework for VDAs. Inclusion under PMLA is squarely in line with global best practices to keep VDA transactions and activities under the scanner to deal with the issue of money laundering. The United States, for instance, announced as far back as 2013 that VDA administrators and exchangers would be governed by the Bank Secrecy Act and the Financial Crimes Enforcement Network (FinCEN) regulations.
More recently, the US Congress clarified in its Anti-Money Laundering Act of 2020 that regulations would also apply to entities that deal in VDAs. The FinCEN, which is run by the US Treasury Department, also issued a guidance back in 2019 that mixers or tumbler services must comply with its Bank Secrecy Act and has further clarified that all anti-money laundering obligations extend to Decentralised Finance (DeFi) as well.
Security measures like those provided for in the PMLA might seem restrictive at first glance, but they are the first step to building investor confidence in new-age assets like VDAs and to ringfence the industry from exploitation through activities like money laundering. With India emerging as one of the largest markets in the world for Web3, this move will go a long way towards empowering legitimate businesses that seek to promote VDA trading and, in time, will hopefully have the effect of weeding out the bad actors.
