Taking the lead on regulation of digital assets

Source: The post is based on an article “Taking the lead on regulation of digital assets” published in The Indian Express on 23^rd December 2022.

Syllabus: GS 3 – Security

Relevance: measures to curb digital financial crimes

News: The G20’s Finance Track discussions came up with the regulation of Virtual Digital Assets (VDAs) to curb financial crimes such as money laundering and terror financing as a priority.

What are the concerns linked to VDAs?

VDAs are often misused for financial crimes. There is – a) lack of proper regulatory measures, b) lack of reporting and transparency norms, c) absence of international consensus on regulatory design.

Therefore, India has a critical role to play in shaping the global regulatory environment as it is one of the highest-ranked countries in terms of VDA adoption and also heading the presidency of G20.

What measures can be taken by India?

India can allow anti-money laundering (AML) authorities to have control over VDA transactions, have power to impose controls upon them and prosecute in the event of any misuse.

These principles are included in the Financial Action Task Force Guidelines on Virtual Asset Transactions (FATF Guidelines). These guidelines have been adopted by various jurisdictions, including the EU, Japan and Singapore.

What are Financial Action Task Force Guidelines on Virtual Asset Transactions?

It prescribes minimum AML/CFT standards that countries should use to prevent the misuse of VDA transactions. The Guidelines are applicable to VDA service providers of member states like India. 

The key features of guidelines are – a) license/registration requirements and extensive reporting and record-keeping obligations for VDA service providers, b) verifying the customer and beneficiary’s identities for all transactions exceeding $1,000, c) it requires VDA service providers to perform enhanced obligations such as tracking the customer’s IP address to ensure there are no links to illicit activities when a transaction is with a higher-risk country.

This AML/CFT framework in India exists under the Prevention of Money Laundering Act, 2002 (PMLA). It also includes reporting obligations for overseas transactions that fall under the ambit of suspicious transactions.

However, PMLA does not apply to the VDA industry.

What is the way ahead?

Even though PMLA does not apply do VDAs, the government has the power to make the VDA industry come under the PMLA. This would make VDAs to report offshore transactions and be subject to regulatory framework.

Therefore, the current discussion of G20 on VDAs and India coming up with the Digital Data Protection Bill and the Digital India Act will ensure Indians and digital businesses operate under the rights and responsibility framework.