The story so far: On March 7, further tightening the loosely regulated crypto market, the Finance Ministry said that all virtual digital assets (VDAs) will fall under the purview 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 touted as India’s commitment to the Vienna Convention on Combating Money Laundering, Drug Trafficking and the Suppression of the Financing of Terrorism ( CFT). The law was aimed at curbing the process of converting illegally earned money into legal cash. The Act empowered the Enforcement Directorate (ED) to control money laundering, confiscate property and punish offenders.
Editorial | Late but important: On bringing all trade in virtual digital assets under PMLA
In July 2022, Union Finance Minister Pankaj Chaudhary told the Lok Sabha, in response to a query on cases registered by the ED, that “up to 31 March 2022, the ED registered about 5,422 cases, attaching proceeds to the tune of ₹1,04,702 crore (approx.) , filed prosecution in 992 cases resulting in confiscation of ₹869.31 crore and convicted 23 accused persons under PMLA.”
What does this move mean for crypto?
The Gazette notification by the ministry brings cryptocurrency transactions within the purview of PMLA. This means that Indian crypto exchanges must report any suspicious activity related to the purchase or sale of cryptocurrency to the Financial Intelligence Unit – 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 foreign FIUs. In its analysis, if the FIU-IND finds errors, it will notify the ED. Under Sections 5 and 8(4) of the Act, the ED has discretionary powers to search and seize suspect property without judicial authorization.
Why is the government tightening its legislative grip on digital commerce?
For a little more than a decade, cryptocurrencies, non-fungible tokens (NFTs) and other digital assets enjoyed a regulation-free environment. But over the past couple of years, as the use of digital assets has gone mainstream, regulators have become hawkish. The value of all existing cryptocurrency is around $804 billion as of January 3, 2023, according to cryptocurrency price tracking website CoinMarketCap.com. That is roughly double the GDP of Singapore in 2021. In India, according to a survey conducted by crypto exchange KuCoin, over 10 crore Indians have invested in cryptocurrencies.
Separately, according to a report by blockchain analytics firm Chainalysis, illegal use of cryptocurrency reached a record $20.1 billion last year. Transactions linked to sanctioned entities jumped over 1,00,000 times, accounting for 44% of last year’s illegal activity.
What tools can be used to track money laundering via crypto transactions?
Tracking money trails in 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) norms. But the technological nature of VDAs presents a new challenge when it comes to gathering information. This requires the intelligence unit to expand its intelligence framework.
The Egmont Group, which facilitates cooperation between FIUs to prevent money laundering, recommends analysis of crypto wallets, associated addresses and blockchain records, and hardware identifiers such as IMEI (International Mobile Equipment Identity), IMSI (International Mobile Subscriber Identity) or SEID (Secure Element Identity). identifier) numbers, 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 at various stages of designing regulations around crypto. Most countries have already included digital assets under anti-money laundering laws. Singapore, Japan, Switzerland and Malaysia have regulatory laws. The USA, UK, Australia and Canada have initiated plans for regulation. So far, China, Qatar and Saudi Arabia have issued a blanket ban on cryptocurrency. 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.
