There are two reasons for this. First, crypto-assets or private currencies are not issued or regulated by financial institutions, but are usually issued through decentralized blockchains, which makes regulation very difficult. Blockchain may not be subject to any regulations or KYC requirements related to reporting suspicious transactions. Second, the crypto-ecosystem is not limited by geographical boundaries. A person in India can transfer a crypto-asset for value anywhere in the world without using official banking channels or fiat currency and without identity verification.
Since blockchain transactions are anonymous, transaction tracking and currency control are extremely difficult.
There are two touchpoints in the crypto-ecosystem that can be used to implement and enforce regulation: the conversion of a crypto-asset into fiat currency and the functionality of intermediaries.
Recent amendments to the Prevention of Money Laundering Act, 2022 (PMLA) aim to use these touchpoints as a basis for regulation. The set of transactions subject to the PMLA includes (i) exchanges between virtual digital assets and fiat currencies; (ii) exchange one or more forms of virtual digital assets; (iii) transferring virtual digital assets; (iv) own or operate virtual digital assets or equipment that provides control over virtual digital assets; and (v) participate in and provide financial services related to the issuer's offering and sale of virtual digital assets Transactions involving the exchange of two virtual digital assets may be more difficult to trace, but oversight and regulation of intermediaries to convert crypto-assets into fiat currency is more realistic.
As a result of this change, intermediaries operating in the crypto ecosystem such as crypto exchanges, wallets and other service providers will have to continue to comply with PMLA controls and systems such as KYC checks on client registration, retention of client data for a specified period of time. Report suspicious transactions as "Reportable Entity" and have policies to track transactions Many cryptocurrency exchanges in India already (voluntarily) adhere to some basic KYC regulations, but a single standard serves all market participants. Banks are required to implement specific security measures and controls when authorizing payments for virtual digital assets.
Bringing virtual digital asset transactions under the PMLA will play an important role in combating fraud and building confidence in the crypto-economy for investors, retail customers and financial markets.
Trading cryptocurrencies or currencies will now be closer to trading securities in terms of KYC and registration procedures on exchanges and platforms.
However, these amendments to the PMLA in no way legitimize or legitimize private cryptocurrencies. Virtual digital currencies still require a comprehensive legal framework, which should ideally include a market regulator for the crypto-ecosystem and the need to regulate intermediaries. Industry fears that without a centralized market regulator, investigative agencies (such as law enforcement bureaus) could become the primary watchdog of the cryptoeconomy.
As these rules are implemented and enforced, it could send a signal to financial regulators that effective regulation of private crypto-asset transactions is possible and not a ban.
The inclusion of virtual digital assets under the PMLA aligns India's legal framework with global efforts to regulate cryptocurrency trading. This is particularly useful because a globally coordinated effort is the only way to effectively regulate a crypto-ecosystem that adequately crosses sovereign borders.
(Written by Shardul Amarchand Mangaldas, Partner and Head of FinTech)
(Note: Recommendations, suggestions, opinions and expert opinions are his own. They do not reflect the views of Economic Times)