Crypto under PMLA: New rules of the game
The government’s move is in line with policy makers globally. It must urgently decide on a full-time regulator for this sector
The central government has tightened regulatory control over virtual digital assets, more commonly known as cryptocurrencies. According to an announcement, the authorities have mandated that a number of trading activities in such assets will now fall under the Prevention of Money Laundering Act (PMLA). In other words, at the forefront, trading between cryptocurrencies and fiat currencies or between cryptocurrencies and other such services can be investigated by agencies such as the Enforcement Directorate (ED) and the Income Tax Department. The move should be seen in light of the government’s efforts to bring cryptocurrencies under greater regulation. In April 2022, for example, the government introduced a 30 percent income tax on gains from cryptocurrencies. Later in July 2022, the government introduced rules on 1 percent withholding tax on cryptocurrency. Broadly speaking, greater regulation of cryptocurrencies is advisable.
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The starting point for this regulation is the government’s decision not to accept cryptocurrencies as “currencies” and instead treat them as virtual digital assets. This lack of recognition strikes at the heart of what cryptocurrencies essentially aim to do: provide an alternative to regulated currencies. The fundamental goal behind cryptocurrencies and their appeal is that they are designed to bypass the financial system and existing regulation. As such, they aim to avoid being tracked or confiscated or frozen by governments. What makes them effective in doing this is that they are anonymous and, since they operate over the internet, not bound by physical boundaries. But these characteristics also bring more risks to any economy. First, absent regulation, they can evade minimum supervisory norms such as Know-Your-Customer regimes, Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) rules, etc. Each of these loopholes increases the chances that cryptocurrencies are used for a range of criminal behaviours. Without effective regulation, there is an even bigger problem at hand: the issue of monetary sovereignty. Since such “private” currencies are often pegged to the US dollar, with greater use they not only replace the Indian rupee, but may also lead to greater “dollarization” of the Indian economy even as the monetary and fiscal authorities (read RBI and Govt.) , respectively) lose control.
The government’s move is in line with most regulators and decision makers globally. The IMF has for some time now called for a global architecture for the effective regulation of such assets since they cannot be covered by neat geographical divisions. However, as the reports in this article show, the industry units are concerned about the lack of time they have to comply with the new norms. Additionally, for the sake of effective regulation, the government needs to decide on a full-time regulator for this sector at the earliest and not leave entities dealing in cryptocurrencies at the mercy of investigative agencies alone.
© The Indian Express (P) Ltd
