11 March 2023

Table of Contents

Cryptocurrency under PMLA: What changes for those investing in VDAs now

GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

The Centre has recently included cryptocurrencies in the scope of the Prevention of Money Laundering Act (PMLA). As per the government's notification, transactions involving the conversion of virtual digital assets to fiat currencies, exchange between different types of virtual digital assets, and transfer of digital assets will now fall under the purview of anti-money laundering laws.

The definition of "virtual assets" would include cryptocurrencies and non-fungible tokens.

In essence, this implies that the Enforcement Directorate (ED) can now probe any illicit financial activity related to cryptocurrency assets.

Crypto-currency

• Cryptocurrency is a type of digital or virtual currency that is secured by cryptography, which prevents counterfeiting and double-spending.
• One of the defining characteristics of cryptocurrencies is that they are not issued by any central authority, making them theoretically resistant to government manipulation or interference.
• Many cryptocurrencies operate on a decentralized network that uses blockchain technology to maintain a distributed ledger across multiple computers.
• Cryptocurrencies can be used to facilitate secure online payments without the need for intermediaries.
• They can be acquired through mining, purchasing on cryptocurrency exchanges, or earning as rewards for contributing to blockchain-based systems.
• Bitcoin and other cryptocurrencies are made possible by blockchain technology, which is essentially a decentralized ledger that records verified transactions across a network of nodes.
• Each block in a blockchain contains a set of transactions that must be validated by each node on the network, making it very difficult to alter transaction records.
• The contents of a blockchain ledger are maintained by a distributed network of individual nodes.
• Examples of famous cryptocurrencies include Bitcoin, Ethereum, and Litecoin.

Disadvantages of cryptocurrency

• Transactions are pseudonymous
• Pseudonymity allows for potential criminal activities
• Tendency towards high centralization
• Expensive to participate and earn rewards in a network
• Potential security issues off the blockchain
• Highly volatile prices

Advantages of cryptocurrency

• Eliminates single points of failure
• Facilitates easier fund transfers between parties
• Removes the need for intermediaries
• Can generate returns
• Streamlines remittances

Are Cryptocurrencies Legal?

• Cryptocurrencies are not backed by any public or private entities, making it difficult to determine their legal status in different financial jurisdictions worldwide.
• The lack of backing from a central authority means that cryptocurrencies have largely functioned outside of traditional financial infrastructure.
• The legal status of cryptocurrencies has implications for their use in daily transactions and trading.
• In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should comply with the requirements of its Travel Rule, which mandates AML compliance.
• As of January 2023, only El Salvador and the Central African Republic have accepted Bitcoin as legal tender for monetary transactions.
• Cryptocurrency regulation varies by jurisdiction in the rest of the world.

The legal status of Crypto in India

• The government introduced a tax for cryptocurrencies in the Union Budget last year, but did not proceed with regulations.
• The Reserve Bank of India (RBI) had previously proposed a ban, which was set aside by a court order. 
• In July of the same year, Finance Minister acknowledged the RBI's concerns and said that effective regulation or a ban on cryptocurrency would require "international collaboration."
• Starting in April 2022, India implemented a 30 percent income tax on profits from cryptocurrencies.
• In July 2022, rules mandating a 1 percent tax deduction at source on cryptocurrency were put into effect.

Understanding PMLA, India's Law against Money Laundering

• The Centre can seize property earned through illegal proceeds under the Prevention of Money Laundering Act, 2022 (PMLA), which aims to prevent the legalization of illegally acquired money.
• The ED investigates these offenses, while the Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance is responsible for processing, analyzing, and disseminating information on suspect financial transactions.
• FIU-IND is an independent body that reports directly to the Economic Intelligence Council (EIC), which is led by the Finance Minister. 
• Individuals found guilty of money laundering can face rigorous imprisonment of at least three years and up to seven years, and there is no limit to the fine that can be imposed. Furthermore, their property can be seized and attached.

What Impact Will the Inclusion of Cryptocurrency in PMLA Have?

• Investors will now face increased scrutiny by agencies, and those found using VDAs for illegal purposes will be subject to the same penalties as other money laundering activities.
• The Anti-Money Laundering law mandates that "reporting entities" maintain the Know Your Customer (KYC) details of their clients and beneficial owners. The new notification classifies VDA entities as "reporting entities" under PMLA, and they must maintain all customer records.
• Furthermore, the extension of PMLA grants authorities more authority to monitor the transfer of cryptocurrency outside of India.

[Ref- Business Standard] 

Fact File