Trade in virtual digital assets under the PMLA

(Mains GS2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.)

Context:

• Recently, the Finance Ministry said that all virtual digital assets (VDAs) will come within the ambit of the Prevention of Money Laundering Act, 2002 (PMLA).

About PMLA:

• The anti-money laundering legislation was passed by the National Democratic Alliance government in 2002, and came into force on July 1, 2005.
• The PMLA was showcased as India’s commitment to the Vienna Convention on combating money laundering, drug trafficking, and countering the financing of terror (CFT). 
• The law was aimed at curbing the process of converting illegally earned money into legal cash. 
• The Act empowered the Enforcement Directorate (ED) to control money laundering, confiscate property, and punish offenders.

Meaning for 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). 
• This central agency is responsible for receiving, processing, analysing, 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 ED and under Section 5 and 8(4) of the Act, the ED has discretionary powers to search and seize suspected property without any judicial permission.

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. 
• The value of all existing cryptocurrency is about $804 billion as of January 3, 2023, according to cryptocurrency price-tracking site CoinMarketCap.com. 
• In India, according to a survey conducted by crypto exchange KuCoin, over 10 crore Indians have invested in cryptocurrencies.
• Separately, 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.

Tracking money trail:

• Tracking money trails in cryptocurrency transactions may require new tools and approaches as such transfers differ fundamentally from traditional banking channels. 
• FIUs may be familiar with Know Your Customer (KYC) or Customer Due Diligence (CDD) norms. 
• But the technological nature of VDAs presents a new challenge in gathering information which requires the intelligence unit to broaden its intelligence framework.

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.