Virtual digital assets, India’s stand and the way ahead

Source– The post is based on the article “Virtual digital assets, India’s stand and the way ahead” published in “The Hindu” on 27th April 2023.

Syllabus: GS2- Governance

Relevance: Regulation of virtual digital assets

News- In a recent notification, the government extended the anti-money laundering provisions to virtual digital assets businesses and service providers.

What are some facts about the notification?

Virtual digital assets platforms will now have to register as a reporting entity with the Financial Intelligence Unit-India. The unit is the national agency to strengthen India’s efforts against money laundering and terror financing.

Reporting entity platforms such as CoinSwitch are now mandated to implement know your customer, record and monitor all transactions, and report to the Financial Intelligence Unit-India when any suspicious activity is detected.

Why is this a step in the right direction?

Such rules are already applicable to banks, financial institutions and certain intermediaries in the securities and real estate markets. Extending them to virtual digital assets provides virtual digital assets platforms with a framework to monitor and take actions against malpractices.

A standardisation of such norms will make the Indian virtual digital assets sector transparent. It will also build confidence and assurance in the ecosystem. It will give the government more oversight on virtual digital asset transactions.

Such risk-mitigation measures are in line with global guidelines put forward by the International Monetary Fund and the Financial Action Task Force.

Such guidelines acknowledge the role Virtual Asset Service Providers (VASP) play in regulating and monitoring the virtual digital assets ecosystem. VASPs are the most efficient bridges and eyes for regulators to effectively implement Anti-Money Laundering provisions.

This could also be the basis for India to reconsider its tax treatment of virtual digital assets. PMLA notification mitigates the most money laundering and terror financing risks. So, there is little reason for the tax rates to be very high.

There is an opportunity to bring virtual digital assets taxes on a par with other asset classes. Reducing tax rates will also help stem the flight of capital, consumers, investments, and talent and tackle the grey economy for virtual digital assets.

This is also significant due to India’s presidency of the G-20. The finance track of the G-20 is discussing the establishment of a global regulatory framework for virtual digital assets. India’s leadership and experience is key here.

There is also an opportunity to consider the steps taken by other G-20 nations. In Asia, Japan and South Korea have established a framework to license VASPs.