New FIU-IND Guidelines for Virtual Digital Asset (VDA) Services

The Financial Intelligence Unit – India (FIU-IND) has issued revised guidelines for reporting entities providing services related to Virtual Digital Assets (VDAs).

• The objective is to prevent misuse of crypto assets for:
  • Money Laundering (ML)
  • Terrorist Financing (TF)
  • Proliferation Financing (PF)
• Notably, in 2023, VDA service providers were brought under the Prevention of Money Laundering Act (PMLA), 2002.

What is FIU-IND?

• FIU-IND is the national nodal agency of the Government of India.
• It monitors and analyses suspicious financial transactions.
• It is responsible for implementing the AML/CFT framework in India.

Key Provisions of the New Guidelines

1. Appointment of Principal Officer (PO)

• Every VDA service provider must appoint a Principal Officer.
• The PO will:
  • Ensure regulatory compliance,
  • File Suspicious Transaction Reports (STRs),
  • Act as the nodal point of coordination with FIU-IND.

2. Cyber Security and Data Protection

• Service providers must:
  • Obtain a cyber security audit certificate from an auditor empanelled with CERT-In.
• Objective:
  • Protection against data breaches, hacking and cybercrime,
  • Safeguarding investor interests.

3. Monitoring of Unhosted (Self-Custody) Wallet Transactions

• Unhosted wallets are wallets controlled directly by users.
• For transactions involving such wallets, service providers must collect:
  • Customer identification details,
  • Purpose of the transaction,
  • Risk assessment information.
  • This will help in tracing illicit activities.

4. AML / CFT / CPF Compliance

• VDA service providers must now follow the same obligations as other reporting entities (banks, NBFCs, etc.), including:
  • KYC compliance,
  • Suspicious transaction reporting,
  • Record maintenance,
  • Risk-based monitoring.

What is a Virtual Digital Asset (VDA)?

As per the Income Tax Act, 1961, a VDA means:

• Any digitally generated information, code, number or token (excluding Indian or foreign currency) created using cryptographic or similar technology that:
  • Represents digital value,
  • Is transferable electronically,
  • Is storable, or
  • Is tradable.

VDAs include:

• Cryptocurrencies
• NFTs (Non-Fungible Tokens)
• Other digital tokens

What is an NFT?

• An NFT is a unique digital token.
• It can represent:
  • Digital art,
  • Music,
  • Game assets,
  • Or real-world assets.

Taxation of VDAs

• Income from the transfer of VDAs is taxed at:
  • 30% tax,
  • Plus surcharge and cess.
• No deduction, exemption, or set-off is allowed.

Significance

Positive Impacts

• Enhanced financial transparency
• Better control over illicit money flows
• Improved investor protection
• Strengthening India’s global AML commitments

Challenges

• Increased compliance costs for small startups
• Technical complexity in monitoring transactions
• Difficulty in tracking transactions in decentralised crypto systems