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Crypto brought under Anti-Money Laundering Law in India 2024

Yesterday, Government issued a notification wherein Crypto was brought under Anti-Money Laundering Law in India 2024. The Indian government extended the scope of the Prevention of Money Laundering Act (PMLA) to include digital assets, including cryptocurrencies, fiat currencies, virtual digital assets, and other related financial services. This move is aimed at tightening the regulation of the cryptocurrency sector in India. On 7th March 2023, a notification was issued by the central government, which brings all digital assets under the purview of PMLA. According to this notification from Finance Ministry, the Prevention of Money Laundering Act (PMLA) will now cover the exchange of virtual digital assets with fiat currencies, the exchange of one or more forms of virtual digital assets, and the transfer of virtual digital assets. This would include all P2P transactions done on Indian and International P2P platforms such as Binance, etc.

 

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What does the notification from Ministry of Finance say on Virtual Digital Assets / Crypto in India?

In its notification dated 7th March 2023, the Indian Government has introduced Anti-Money Laundering provisions for Virtual Digital Assets (VDA). This means that VDA service providers and businesses are now considered 'reporting entities' under the PMLA Act, and are required to comply with reporting standards and KYC norms similar to those of other regulated entities, such as banks, payment system operators, and securities intermediaries.

What is the significance of this notification?

The most significant aspect is that; the Enforcement Directorate can now investigate any financial wrongdoing involving cryptocurrency assets. The definition of ‘virtual digital assets’ would be the same as that in the Income-Tax Act, the notification stated. The definition includes cryptocurrencies and non-fungible tokens, etc. All crypto exchanges are required to report any suspicious activity to the Financial Intelligence Unit India (FIU-IND) and follow KYC, anti-money laundering regulations, and due diligence as per the reporting entities under PMLA. These are routinely followed by banking and other financial entities which fall under the classification of reporting entities under PMLA.

In recent times, many individuals have been using Crypto P2P platforms for illicit transactions. On these platforms, some individuals are trading up to 250 crores without paying any TDS or income tax. And more and more such P2P platforms are mushrooming in India. We are also seeing an increase in number of Income Tax Notices being received by P2P traders.

 
This move also empowers the government to access the information stored by crypto exchanges at any point in time. The responsibility of maintaining transparency, identity, and following regulations lies with cryptocurrency exchanges and its members, which have been facing severe regulatory attention in recent years. The move is expected to push responsibility on cryptocurrency markets to bring transparency to cryptocurrency trading and to help establish a trail for transactions that have historically lacked transparency. The regulations have caused global banks to sever ties with exchanges, straining the exchanges and forcing them to look for an alternative model. Usually compliance requirements such as verification of source of funds, ownership, and financial positions helps bring credibility to the industry. 
 
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Will these new rules prevent misuse of crypto?

The new rules are aimed at preventing misuse of crypto, particularly money laundering. However, they do not impede the regular conversion of Crypto to INR, which is KYC-verified on many Indian platforms. Many exchanges in 2021 decided to restrict crypto movement anyways in their ecosystem to ensure transparency and compliance with Indian laws.

We see this as a step forward in creating a compliant framework for investing in cryptocurrency and demonstrates that the crypto industry is becoming increasingly important in today's digital finance era.

Such regulations would help prevent criminal activities like money laundering and terrorist financing which is rampant on many P2P platforms. While there may be some initial challenges for traders and investors, the long-term outcome could be a more stable and trustworthy environment for the crypto industry to prosper.

What falls within the scope of money laundering, and what are the consequences if you are found to be involved in it?

As per the Indian laws, “whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party who is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money laundering”.

In regards to the crypto space, this means that if someone transfers crypto with monetary value without disclosing it to the government, and the receiver does not report it as income or payment, both parties can be held liable under the money laundering act. Opening a crypto wallet and loading funds in the form of crypto is relatively easy for individuals without the need to disclose their identity or meet KYC requirements especially with decentralised exchanges. Transfers of crypto have no limit, no transaction trail, are valued at par globally, they do not require government approvals, and can be sent within minutes.

As per the money laundering section, anyone who commits this offense shall be punishable with rigorous punishment for a term not less than three years, but which may extend up to seven years, and a fine of up to five lakh rupees.

To streamline things and ensure compliance, exchanges in India must track transfers made by investors exceeding a certain amount within a tax year and report them to the tax authorities. It is important to note that this law will apply to crypto traders, P2P traders, custodians, and financial service providers, including Banks, exchange platforms and blockchain start-up companies.

What was the reason behind the Government's decision to bring Crypto within the scope of this law?

The Enforcement Directorate and Income Tax Department have been investigating several cases of money laundering against cryptocurrency exchanges and transactions. And till date, approximately Rs 936 crore related to cryptocurrency has been seized or attached under the Prevention of Money Laundering Act (PMLA).

Over the past year, at least 10 crypto exchanges have been probed for allegedly aiding foreign firms in laundering money through crypto. The investigation revealed instances of the accused firms purchasing crypto coins for over Rs 100 crore and sending them to international wallets. The KYC details collected by the exchanges were found to be dubious in many cases. The accused firms are estimated to have laundered over Rs 1,000 crore in the instant loan app case, which has links to China.

The government has also seized assets amounting to Rs 289.28 crore under the Foreign Exchange Management Act (FEMA) and issued a show-cause notice to the cryptocurrency exchange, WazirX, and its directors for transactions involving cryptocurrencies worth Rs 2,790 crore under FEMA. The government's notification is expected to assist investigative agencies in taking action against cryptocurrency companies.

Data about individuals is not disclosed yet. Illicit transactions on Crypto P2P platforms have become increasingly common in recent times, with some individuals conducting trades of up to 250 - 500 crores without paying any TDS or income tax. Moreover, the number of such platforms is rapidly increasing in India.

What is the Government's intent?

Previously, the Reserve Bank of India (RBI) has warned individuals against investing in crypto assets. In January, the RBI Governor, Shaktikanta Das, likened investing in crypto to gambling and emphasized that it would undermine the central bank's authority if it continued to grow without regulation. According to him, allowing the use of crypto in India would lead to the loss of the RBI's control over transaction monitoring.

Further, as the current G20 president, India is advocating for global cooperation to regulate virtual digital assets and minimize the associated risks. At the most recent G20 meeting, which concluded on Saturday, Finance Minister Nirmala Sitharaman organized a seminar for member countries to express their concerns about the dangers of cryptocurrencies and to discuss developing a unified framework.

Some major lingering concerns in the Indian Crypto Industry

Since the Indian government introduced its tax policy on virtual digital assets (VDAs), over 1.7 million Indian users have switched from domestic centralized crypto exchanges to foreign crypto platforms, resulting in a significant drop in trading volumes on local cryptocurrency exchanges.

According to a research study, Indian crypto traders have moved over $3.8 billion in trading volume to international crypto platforms. The study warned that this trend could have negative consequences, including reduced tax revenues and transaction traceability. The study recommended measures such as implementing tax deducted at-source (TDS) on VDAs, adopting a progressive tax structure, and reconciling tax rates to ensure revenue maximization.

Conclusion

 
As you all might be knowing that in April 2022, India introduced a 30 per cent income tax on gains made from cryptocurrencies. In July 2022, rules regarding 1 per cent tax deducted at source on cryptocurrency came into effect.

In our opinion, the recent notification from the Central Government indicates a desire to regulate the crypto industry rather than imposing an outright ban, which is a very positive step. It will be interesting to observe how crypto traders, exchanges, service providers and other businesses adjust their services to comply with PMLA obligations without the presence of an industry-specific governing body. Overall, we feel this development will bring in improved governance in the crypto industry, which has long been subject to ambiguous regulations.

It is noteworthy to mention that last month, Finance Minister Nirmala Sitharaman informed Parliament that India was in discussions with G-20 member countries to establish a standard operating protocol for regulating crypto assets. She emphasized that the evolving nature of crypto assets and Web3 necessitates significant international collaboration to effectively legislate these sectors. Since crypto assets are borderless and subject to regulatory arbitrage, any legislation for regulation or banning would require extensive international cooperation to assess risks and benefits and develop a common taxonomy and standards.

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