PMLA covers a boon for crypto
By Anu Tiwari and Utkarsh Bhatnagar
Over the past few years, digital assets and cryptocurrencies have gone mainstream, with increasing trading volumes, new players and exchanges entering the global and Indian markets, increasing scrutiny from law enforcement, emerging global dialogue on preferred means of recognizing and regulating digital assets . Bank Digital Currency (CBDC) related discourse, and of course the latest developments around certain exchanges and heavily traded digital currencies. India is said to be among the world’s top three markets for digital assets.
Concern Governments and regulators globally have expressed their concerns about digital and crypto assets that revolve around anonymity, as well as these assets bypassing age-established financial transaction monitoring frameworks such as anti-money laundering (AML), control of financial terrorism (CFT), tax . evasion, exchange control rules, client identification (KYC), suspicious transaction monitoring, record keeping and reporting. The Financial Action Task Force (FATF), the Bank for International Settlements (BIS), the Organization for Economic Co-operation and Development (OECD) and global regulators, such as those in the US and the UK, as well as the March 9, 2022 Biden Order have helped initiate a global and national consensus around balancing the benefits of emerging cryptographic technologies with the risks to financial order arising from “bad actor” concerns, given the use and trading of virtual digital assets (VDA), as they are. now popularly known.
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In India, we had a series of warnings issued by the Reserve Bank of India (RBI) in 2013 and 2017, followed by the RBI’s cryptocurrency ban circular dated April 6, 2018, which was challenged and overturned by the Supreme Court in March 2020. This was the catalyst. for the hockey stick growth of the Indian digital and crypto assets sector from 2020 to date.
Issues or risks surrounding mis-selling, misleading advertisements promising guaranteed returns, speculative losses, data incidents, offshoring of proceeds of crime and illegal elements in the use of crypto-assets also increased. As a countermeasure, India has been working on a cryptocurrency law. Several drafts of the same, albeit pending global consensus implementation, have rightly been postponed. All this led the Indian government to bring VDAs within the purview of the Income Tax Act last year by levying a 30% tax on gains made through trading in VDAs and a 1% withholding tax (TDS) requirement, leading to a drop in trading volume, as expected. The new definition of VDA ensured superior transaction monitoring, identification of involved actors, better understanding of the benefits and risks associated with digital assets, and was hailed as a positive step.
The main concern the industry still faced was law enforcement scrutiny, including through requests for information under the Criminal Procedure Code, the Prevention of Money Laundering Act, 2002 (PMLA) and Rules, and the Foreign Exchange Management Act (FEMA), given the absence of a statutory reporting framework in India for the crypto-assets sector, as only “reporting entities” such as banks, financial institutions, licensed intermediaries and certain notified activities such as casinos, real estate and gems/jewellery sector were required, and eligible, legally complying with client identification/KYC, transaction monitoring, record keeping and reporting requirements in under PMLA.
In a landmark move, on March 7, 2023, the Department of Revenue, Ministry of Finance, issued a notification under the PMLA, notifying certain types of VDA activities as “persons carrying on designated business or profession”, qualifying the sector as a “reporting”. unit” (RE). This will provide much-needed legitimacy to the Indian, and even global, crypto-actors as well as to crypto-assets and digital ecosystems by providing greater transparency and government oversight of the sector from an AML/CFT and tax administration standpoint and weeding out non-serious and bad actors.
Financial Intelligence Unit-India (FIU-IND), in late 2022, revised its reporting user manual and introduced FinGate 2.0 to include data reporting format for younger business models like payment aggregators (now licensed by RBI). However, this and other existing reporting formats under the PMLA do not provide a reporting mechanism for VDA players. Clarity on this would be helpful. The impact on offshore crypto and digital asset exchanges is also not clear, given the jurisdictional challenges, although foreign entities licensed by RBI/Sebi are covered as “reporting entities” under the PMLA, and territoriality-related arguments to avoid reporting may be difficult of global exchanges targeting Indian users. The nature of VDAs and the new Web3 ecosystem is inherently cross-border, both in terms of exchange domicile and trading counterparties. The outcome of the ongoing PayPal/ FIU Delhi High Court proceedings would be interesting to see. Clarity on how crypto exchanges are expected to report VDA transfers covered by the notice, which do not involve actual fiat/cash payouts, would also be helpful.
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While this development by no means signifies supreme recognition for the sector, the air will only clear once the proposed cryptocurrency bill moves forward. The notification is a positive step, and was much awaited by the Indian Web3/VDA industry, and henceforth, it will open a formal channel between the VDA industry and government/law enforcement agencies, which has been missing so far. The PMLA umbrella is wide. As the industry, both in India and abroad, adapts to banking and securities market-like compliance norms; Open communication with the authorities will be key to ensuring monitoring and reporting under PMLA, as VDA players learn the ropes, given the scope and reach of PMLA.
Authors are, respectively, partner and principal associate, Cyril Amarchand Mangaldas
