Finance Ministry brings crypto assets under Prevention of Money Laundering Act: What are the implications?

Source: The post is based on the article “‘Finance Ministry brings crypto assets under Prevention of Money Laundering Act: What are the implications?” published in Indian Express on 10th March 2023.

What is the News?

The Finance Ministry has notified that crypto or virtual asset businesses will now be in the ambit of the Prevention of Money Laundering Act, 2002 (PMLA).

What is the notification issued by the Ministry of Finance?

The Ministry of Finance has issued a circular bringing transactions involving crypto assets under the Prevention of Money Laundering Act. 

It laid out the nature of transactions to be covered under PMLA. These are as follows: 1) Exchange between virtual digital assets and fiat currencies, 2) exchange between one or more forms of virtual digital assets, 3) transfer of virtual digital assets, 4) safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets, 5) participation in and provision of financial services related to an issuer’s offer and 6) sale of a virtual digital asset.

The circular also requires Indian crypto exchanges to report any suspicious activity to the Financial Intelligence Unit-India (FIU-IND). 

It also mandates that crypto exchanges and intermediaries dealing with virtual digital assets (VDAs) must have proper KYC documentation for all customers they onboard.

What is the significance of this circular?

The measure is expected to aid investigative agencies in carrying out action against crypto firms. The Enforcement Directorate and Income Tax Department have either probed or are probing several cases against companies running cryptocurrency exchanges and transactions. ED, for instance, froze the bank balances of the popular WazirX exchange in 2022.

What are the concerns against this circular?

There are concerns that the circular does not offer entities time to adhere to the fresh norms. The industry is also concerned that in the absence of a central regulator, crypto entities could end up dealing directly with enforcement agencies like the ED.

What is the legal status of crypto in India?

In the Union Budget 2022-23, even though the government brought in a tax for cryptocurrencies, it did not proceed with framing regulations. 

In April 2022, India introduced a 30% income tax on gains made from cryptocurrencies. In July 2022, rules regarding 1% tax deducted at source on cryptocurrency came into effect.