Crypto assets brought in under PMLA: First step towards legitimizing the crypto industry
The Indian government’s recent move to bring crypto-assets under anti-money laundering laws has significant implications for the crypto industry. Enacted in 2002, the PMLA aims to prevent money laundering and seize property derived from the laundered money. Banks, financial institutions, intermediaries and other specified persons – collectively referred to as “Reporting Entities” – are required to comply with obligations such as identity verification, record maintenance and transaction reporting under the PMLA.
The Service Providers under the Virtual Digital Asset Ecosystem (“VASPs”) have been notified as a reporting entity (“PMLA Amendment”) and accordingly they will be required to undertake the compliance obligations specified under the PMLA.
A wide range of VASPs such as cryptocurrency exchanges, NFT platforms, cryptocurrency custody solutions and wallet providers, crypto lending and lending platforms, crypto bridges, gaming crypto companies, crypto launch platforms, crypto payment gateways, crypto staking platforms and service providers that facilitate initial coin/token offerings and perform SAFT. to be designated as a reporting entity and will be subject to the compliance obligations under the PMLA.
This move by the government marks the first step towards regulation of the Indian crypto industry. While KYC and anti-money laundering (“AML”) policies were generally put in place by the incumbents as an industry practice, VASPs now have a statutory obligation to carry out these compliances. The PMLA amendment will also bring standardization to the industry with respect to compliance obligations. A view that PMLA’s operation is limited to only Indian geography and has no extraterritorial operation may be difficult. Therefore, even non-resident service providers, especially those targeting Indian users, should also consider their position with regard to compliance with the PMLA.
The decentralization, pseudonymity and global nature of cryptocurrencies have made it challenging for regulators to develop a clear policy approach. While industry players see anonymity as an inherent property of cryptoassets, regulators have emphasized the importance of identity verification for AML and counter-financing of terrorism (“CFT”). A key approach to regulating cryptoassets from an AML perspective is to impose compliance obligations on the intermediaries involved in cryptoasset transactions. Given that these obligations are imposed on intermediaries, implementation and enforcement measures against decentralized organizations (which are common in the ecosystem) can be challenging. However, FATF’s report on “Targeted Update of Implementation of FATF’s Standards for Virtual Assets and Virtual Asset Service Providers” (June 2022) also notes that ‘decentralized’ is used more from a marketing point of view rather than from a technical perspective, and therefore may even the so-called decentralized arrangements be subject to AML / CFT standards.
The recent changes in tax and corporate laws combined with the PMLA amendment has definitely shifted the narrative for crypto assets from “ban” to “regulate”. Furthermore, with the PMLA amendment, the crypto industry has been put on the same pedestal as banking and financial institutions. While the crypto sector has always received a skeptical view, the PMLA amendment will act as a deterrent to the undesirable players, increase confidence in the ecosystem, lend legitimacy to the operation of VASPs, attract institutional capital and may also help remove the shadow. bans imposed on the crypto industry by banking and payment solution providers. The PMLA compliance can now provide a shield for VASPs and help authorities identify bad actors and hence the focus can shift from VASPs to the actual suspects.
The PMLA amendment will also bring the Indian crypto industry closer to FATF’s standard on virtual assets and virtual asset service providers, which will also help alleviate India’s position in the FATF’s global review to be held in June 2023.
In conclusion, while the PMLA amendment is a positive step for the development of the Indian crypto industry, ambiguity still exists regarding the overall regulatory direction of crypto assets in India. This would weed out the bits and pieces and fake players. It will lead to market consolidation and reduce fraud by common people. Introducing separate legislation for crypto-assets, possibly including having a licensing regime, will strengthen the industry with necessary oversight from regulators.
By: Vaibhav Parikh, Head, M&A & PE and Technology-Media-Telecom Practice
(Author’s note: Special thanks to Vibhore Batwara, Member, Nishith Desai Associates for research input on this article)
The Service Providers under the Virtual Digital Asset Ecosystem (“VASPs”) have been notified as a reporting entity (“PMLA Amendment”) and accordingly they will be required to undertake the compliance obligations specified under the PMLA.
A wide range of VASPs such as cryptocurrency exchanges, NFT platforms, cryptocurrency custody solutions and wallet providers, crypto lending and lending platforms, crypto bridges, gaming crypto companies, crypto launch platforms, crypto payment gateways, crypto staking platforms and service providers that facilitate initial coin/token offerings and perform SAFT. to be designated as a reporting entity and will be subject to the compliance obligations under the PMLA.
This move by the government marks the first step towards regulation of the Indian crypto industry. While KYC and anti-money laundering (“AML”) policies were generally put in place by the incumbents as an industry practice, VASPs now have a statutory obligation to carry out these compliances. The PMLA amendment will also bring standardization to the industry with respect to compliance obligations. A view that PMLA’s operation is limited to only Indian geography and has no extraterritorial operation may be difficult. Therefore, even non-resident service providers, especially those targeting Indian users, should also consider their position with regard to compliance with the PMLA.
The decentralization, pseudonymity and global nature of cryptocurrencies have made it challenging for regulators to develop a clear policy approach. While industry players see anonymity as an inherent property of cryptoassets, regulators have emphasized the importance of identity verification for AML and counter-financing of terrorism (“CFT”). A key approach to regulating cryptoassets from an AML perspective is to impose compliance obligations on the intermediaries involved in cryptoasset transactions. Given that these obligations are imposed on intermediaries, implementation and enforcement measures against decentralized organizations (which are common in the ecosystem) can be challenging. However, FATF’s report on “Targeted Update of Implementation of FATF’s Standards for Virtual Assets and Virtual Asset Service Providers” (June 2022) also notes that ‘decentralized’ is used more from a marketing point of view rather than from a technical perspective, and therefore may even the so-called decentralized arrangements be subject to AML / CFT standards.
The recent changes in tax and corporate laws combined with the PMLA amendment has definitely shifted the narrative for crypto assets from “ban” to “regulate”. Furthermore, with the PMLA amendment, the crypto industry has been put on the same pedestal as banking and financial institutions. While the crypto sector has always received a skeptical view, the PMLA amendment will act as a deterrent to the undesirable players, increase confidence in the ecosystem, lend legitimacy to the operation of VASPs, attract institutional capital and may also help remove the shadow. bans imposed on the crypto industry by banking and payment solution providers. The PMLA compliance can now provide a shield for VASPs and help authorities identify bad actors and hence the focus can shift from VASPs to the actual suspects.
The PMLA amendment will also bring the Indian crypto industry closer to FATF’s standard on virtual assets and virtual asset service providers, which will also help alleviate India’s position in the FATF’s global review to be held in June 2023.
In conclusion, while the PMLA amendment is a positive step for the development of the Indian crypto industry, ambiguity still exists regarding the overall regulatory direction of crypto assets in India. This would weed out the bits and pieces and fake players. It will lead to market consolidation and reduce fraud by common people. Introducing separate legislation for crypto-assets, possibly including having a licensing regime, will strengthen the industry with necessary oversight from regulators.
By: Vaibhav Parikh, Head, M&A & PE and Technology-Media-Telecom Practice
(Author’s note: Special thanks to Vibhore Batwara, Member, Nishith Desai Associates for research input on this article)
