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Explained | Why is crypto trade within PMLA ambit?

Indian crypto exchanges will now have to report any suspicious activity related to buying or selling of cryptocurrency to the Financial Intelligence Unit – India (FIU-IND). File
| Photo Credit: Reuters

The story so far: On March 7, to further tighten the loosely regulated crypto market, the Finance Ministry said that all virtual digital assets (VDAs) will come within the ambit of the Prevention of Money Laundering Act, 2002 (PMLA).

What is the PMLA?

The anti-money laundering legislation was passed by the National Democratic Alliance government in 2002, and came into force on July 1, 2005. The PMLA was showcased as India’s commitment to the Vienna Convention on combating money laundering, drug trafficking, and countering the financing of terror (CFT). The law was aimed at curbing the process of converting illegally earned money into legal cash. The Act empowered the Enforcement Directorate (ED) to control money laundering, confiscate property, and punish offenders.

Editorial | Belated, but essential: On bringing all trade in virtual digital assets under the PMLA

In July 2022, Union Minister of State for Finance Pankaj Chaudhary told the Lok Sabha, in response to a query on cases registered by the ED, that “till March 31, 2022, the ED recorded around 5,422 cases, attached proceeds to the tune of ₹1,04,702 crore (approx.), filed Prosecution Complaint in 992 cases resulting in confiscation of ₹869.31 crore and convicted 23 accused persons under PMLA.”

What does this move mean for crypto?

The gazette notification by the Ministry brings cryptocurrency transactions within the ambit of PMLA. This means that Indian crypto exchanges will have to report any suspicious activity related to buying or selling of cryptocurrency to the Financial Intelligence Unit – India (FIU-IND). This central agency is responsible for receiving, processing, analysing, and disseminating information related to suspicious financial transactions to law enforcement agencies and overseas FIUs. In its analysis, if the FIU-IND finds wrongdoing, it will alert the ED. Under Section 5 and 8(4) of the Act, the ED has discretionary powers to search and seize suspected property without any judicial permission.

Why is the government tightening the legislative grip on digital trade?

For a little more than a decade, cryptocurrencies, non-fungible tokens (NFT) and other digital assets enjoyed a regulation-free environment. But, in the past couple of years, as the use of digital assets has gone mainstream, regulators have turned hawkish. The value of all existing cryptocurrency is about $804 billion as of January 3, 2023, according to cryptocurrency price-tracking site CoinMarketCap.com. That is about twice the GDP of Singapore in 2021. In India, according to a survey conducted by crypto exchange KuCoin, over 10 crore Indians have invested in cryptocurrencies.

Separately, according to a report by blockchain analytics firm Chainalysis, illegal use of cryptocurrencies hit a record $20.1 billion last year. Transactions associated with sanctioned entities jumped over 1,00,000-fold, making up 44% of last year’s illegal activity.

What tools can be used to track money laundering via crypto transactions?

Tracking money trail in cryptocurrency transactions may require new tools and approaches as such transfers differ fundamentally from traditional banking channels. FIUs may be familiar with Know Your Customer (KYC) or Customer Due Diligence (CDD) norms. But the technological nature of VDAs presents a new challenge in gathering information. This requires the intelligence unit to broaden its intelligence framework.

The Egmont Group that facilitates cooperation between FIUs to prevent money laundering recommends the analysis of crypto wallets, its associated addresses and blockchain records, and hardware identifiers like IMEI (International Mobile Equipment Identity), IMSI (International Mobile Subscriber Identity) or SEID (Secure Element Identifier) numbers, as well as MAC addresses.

What about regulation in other countries?

According to PwC’s ‘Global Crypto Regulations Report 2023’, a large proportion of countries are at various stages of drafting regulations around crypto. Most countries have already brought digital assets under anti-money laundering laws. Singapore, Japan, Switzerland, and Malaysia have legislations on regulatory framework. The U.S., U.K., Australia, and Canada have initiated plans on regulating. So far, China, Qatar, and Saudi Arabia have issued a blanket ban on cryptocurrency. The EU is also preparing a cross-jurisdictional regulatory and supervisory framework for crypto-assets. The framework seeks to provide legal clarity, consumer and investor protection, and market integrity while promoting innovation in digital assets.

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