Bringing crypto transactions under the lens of the PMLA: What does this mean for the market?

One of the key risks of a crypto ecosystem identified by regulators not only in India, but globally, is the difficulty in enforcing money laundering controls.

There are two reasons for this. First, private crypto assets or currencies are not issued or managed by financial institutions, but are typically issued via a decentralized blockchain, making them extremely difficult to regulate. TO block chain cannot be subjected to KYC rules or requirements related to the reporting of suspicious transactions. Second, the crypto ecosystem is not limited to geographic boundaries. A person in India could transfer a crypto asset worth to a person anywhere in the world, without using any formal banking channel or fiat currency and without having to complete any identity verification.

Since transactions on a blockchain are anonymous, tracking transactions and implementing currency exchange controls become extremely difficult.

There are two regulatory touchpoints within a crypto ecosystem that can be leveraged to enforce and implement regulation: the moment a crypto asset converts to fiat currency and the operation of intermediaries.

The recent amendments to the Money Laundering Prevention Law, 2022, (PMLA) seeks to use these touchpoints as the basis for regulation. The set of transactions that have been placed under the scope of the PMLA they include (i) the exchange between virtual digital assets and fiat currencies; (ii) exchange between one or more forms of virtual digital assets; (iii) transfer of virtual digital assets; (iv) custody or administration of virtual digital assets or instruments that allow the control of virtual digital assets; and (v) participation and provision of financial services related to the offer and sale of a virtual digital asset by an issuer.

Transactions involving the exchange between two virtual digital assets may be more difficult to monitor, but oversight of crypto-to-fiat conversion and regulation of intermediaries is more realistic.

As a result of this amendment, intermediaries operating in the crypto ecosystem, such as crypto exchanges, wallets, and other service providers, will be required to implement PMLA controls and systems, such as KYC controls, when onboarding customers, retaining customer data during prescribed periods, monitor and report. suspicious transactions as "reporting entities" and have policies in place for tracking transactions. Many crypto exchanges in India already (voluntarily) complied with certain basic KYC standards, but a uniform standard for all market players is useful. Banks will need to implement detailed safeguards and controls when enabling payments for virtual digital assets.

Bringing transactions in virtual digital assets within the scope of the PMLA will play a critical role in controlling fraud and strengthening the confidence of investors, retail consumers and financial markets in the crypto economy.

Trading crypto assets or currencies will now be closer to trading securities through regulated exchanges and platforms in terms of KYC and onboarding procedures.

These amendments to the PMLA, however, in no way legitimize or legalize private property. CRYPTOCURRENCIES. There is still a need for a comprehensive legislative framework for virtual digital currencies, which should ideally also provide a market regulator for the crypto ecosystem and the need to regulate intermediaries. The industry fears that without such a centralized market regulator, investigative agencies (such as the directorate of compliance) could become the main watchdog of the crypto economy.

As these rules are implemented and enforced, it can send a signal to financial regulators that effective regulation of transactions in private crypto assets is possible and that a ban is not warranted.

Bringing transactions in virtual digital assets within the scope of the PMLA also aligns the Indian legal framework with global efforts to regulate crypto asset trading. This is particularly useful given that ultimately a coordinated global effort is the only way to effectively regulate the crypto ecosystem, which seamlessly crosses sovereign borders.

(Author is Fintech Partner and Director Shardul Amarchand Mangaldas)

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