Indian cryptocurrency exchanges will now have to report any suspicious activity related to buying or selling cryptocurrency to the Financial Intelligence Unit of India (FIU-IND). File | Photo credit: Reuters
The story so far: On March 7, to further tighten the loosely regulated crypto market, said the Ministry of Finance that all virtual digital assets (VDAs) will fall within the scope of the Prevention of Money Laundering Act 2002 (PMLA).
What is PMLA?
The anti-money laundering legislation was passed by the National Democratic Alliance government in 2002 and came into effect on 1 July 2005. The PMLA was billed as India's commitment to Vienna Convention on the fight against money laundering, drug trafficking and the financing of terrorism (CFT). The law was intended to slow down the process of converting illegally earned money into legal cash. The act empowered the Execution Directorate (ED) to control money laundering, confiscate assets and punish offenders.
Writing | Late But Essential: On Incorporating All Trading In Virtual Digital Assets Under The PMLA
In July 2022, Union Minister of State for Finance Pankaj Chaudhary told Lok Sabha, in response to a query about the cases registered by the ED, that โuntil March 31, 2022, the ED registered about 5422 cases, attached proceeds to the tune of โน1,04.702 crore (approx), filed prosecution suit in 992 cases resulting in confiscation of โน869.31 crore and sentenced 23 accused persons under PMLAโ.
What does this move mean for cryptocurrencies?
The gazette notification by the Ministry brings cryptocurrency transactions within the scope of PMLA. This means that Indian cryptocurrency exchanges will be required to report any suspicious activity related to buying or selling cryptocurrency to the Financial Intelligence Unit of India (FIU-IND). This central agency is responsible for receiving, processing, analyzing and disseminating information related to suspicious financial transactions to law enforcement agencies and FIUs abroad. In its analysis, if the FIU-IND finds irregularities, it will alert the ED. Under Section 5 and 8(4) of the Act, the ED has discretionary powers to search and seize suspicious property without any judicial permission.
Why is the government tightening legislative control over digital commerce?
For just over a decade, cryptocurrencies, non-fungible tokens (NFTs), and other digital assets enjoyed a regulation-free environment. But, in the past two years, as the use of digital assets has become more widespread, regulators have become aggressive. The value of all existing cryptocurrencies is approximately $804 billion as of January 3, 2023, according to cryptocurrency price tracking site CoinMarketCap.com. That is about double Singapore's GDP in 2021. In India, according to a survey by cryptocurrency exchange KuCoin, more than 10 crore Indian rupees have invested in cryptocurrency.
Separately, according to a report by blockchain analytics firm Chainalysis, illegal cryptocurrency use hit a record $20.1 billion last year. Transactions associated with sanctioned entities increased more than 100,000 times, representing 44% of illegal activity last year.
What tools can be used to track money laundering through crypto transactions?
Tracking the money trail of cryptocurrency transactions may require new tools and approaches, as such transfers differ fundamentally from traditional banking channels. FIUs may be familiar with Know Your Customer (KYC) or Customer Due Diligence (CDD) standards. But the technological nature of VDAs presents a new challenge in data collection. This requires the intelligence unit to broaden its intelligence framework.
The Egmont Group which facilitates cooperation between FIUs to prevent money laundering recommends analysis of crypto wallets, their associated addresses and blockchain records, and hardware identifiers such as IMEI (International Mobile Equipment Identity), IMSI (International Mobile Identity of Mobile Subscriber) or SEID (Secure Element). identifier), as well as MAC addresses.
What about regulation in other countries?
According to PwC's 'Global Crypto Regulations Report 2023', a large proportion of countries are in various stages of drafting regulations around cryptocurrencies. Most countries have already subjected digital assets to anti-money laundering laws. Singapore, Japan, Switzerland and Malaysia have laws on the regulatory framework. The US, UK, Australia and Canada have initiated regulatory plans. So far, China, Qatar, and Saudi Arabia have issued a blanket ban on cryptocurrencies. The EU is also preparing a cross-jurisdictional regulatory and supervisory framework for crypto assets. The framework seeks to provide legal clarity, consumer and investor protection, and market integrity while promoting innovation in digital assets.
