Money laundering has been a major concern for governments and financial institutions around the world for decades. Various methods are used to launder illegally acquired funds, including buying real estate properties, investing in businesses, and moving money through shell companies. However, in recent years, cryptocurrencies have emerged as a new and innovative way to launder money, owing to their anonymity and decentralized nature. In India, several measures have been introduced to regulate cryptocurrencies, including significant amendments to the Prevention of Money Laundering Act (“PMLA“).
The Ministry of Finance, via a notification dated March 07, 2023 (“Notification“)1 brought virtual digital assets (“VDA“), which involve cryptocurrency, under the ambit of the PMLA. The Notification brings the exchange of VDAs for fiat money, the exchange of one or more types of VDAs, the transfer of VDAs, the storage or management of VDAs or tools that allow control over VDAs, as well as involvement in and the delivery of financial services associated with an issuer’s offer and sale of a VDAs under the provisions of the PMLA.
VDAs are defined under the Income Tax Act, 1961 as:
“(a) any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically;
(b) a non-fungible token or any other token of similar nature, by whatever name called; and
(c) any other digital asset, as the Central Government may, by notification in the Official Gazette specify”.
As cryptocurrencies are decentralized and operate outside the traditional banking system, cryptocurrencies are widely used to launder funds acquired illegally. Funds can be easily moved from one cryptocurrency wallet to another, making it difficult for law enforcement agencies to track and trace these transactions.
By including cryptocurrencies under the purview of the PMLA, the Indian government will be able to regulate and monitor the trading of cryptocurrencies. It means that any transaction involving cryptocurrencies that is deemed to be a “proceeds of crime” will be subject to investigation under the PMLA. Cryptocurrency exchanges and traders will now be required to comply with the Know Your Customer (KYC), anti-money laundering norms and due diligence standards as banks and other financial institutions, which are categorised as reporting organisations under the PMLA. They will also be required to submit suspicious transaction reports (STRs) to the Financial Intelligence Unit (“FIU“). The FIU will then analyze these reports and investigate any suspicious transactions.
Before this action, a month earlier, the Finance Bill incorporated a modification to the Income Tax Act under section 271C, which punishes failure to pay Tax Deducted at Source (TDS) on VDAs. This was another attempt at regulation of cryptocurrencies. The said modification introduced a fine equal to the unpaid TDS or a jail sentence of up to six months, in the event of non-payment.
By way of these amendments, the Enforcement Directorate has the authority to look into any financial misdeed concerning cryptocurrency assets. The new regulations will require cryptocurrency exchanges, custodians, administrators to alert the FIU to any questionable behaviour. Members of the cryptocurrency sector must now take appropriate efforts to verify and maintain accounts for individuals and transactions as well as report any suspicious behaviour to the FIU. Additionally, this action gives the government unlimited access to the data maintained by cryptocurrency exchanges.
This move by the Indian government will also help to boost investor confidence in cryptocurrencies. With clear regulations in place, investors will be more willing to invest in cryptocurrencies, knowing that their investments are protected and regulated. However, there are some challenges that the Indian government will face in implementing these regulations. Cryptocurrencies operate on a global scale, and there is no centralized authority to regulate them. Therefore, it will be of utmost importance for the Indian government to coordinate with other countries to combat money laundering through cryptocurrencies.
Another challenge that the Indian government will face is the lack of awareness about cryptocurrencies among the general public. Cryptocurrencies being a relatively new concept, many people do not understand how they work. Therefore, the government will need to focus on educating the public about cryptocurrencies and their potential risks and benefits.
In conclusion, the Indian government’s move to include cryptocurrencies under the PMLA is a step in the right direction towards combating money laundering through cryptocurrencies. Cryptocurrencies have been a boon for criminals, allowing them to launder their illegal funds with ease. However, with clear regulations in place, the Indian government will be able to regulate and monitor the trading of cryptocurrencies, bringing them under the tax net and boosting investor confidence. While there are challenges that the Indian government will face in implementing these regulations, this move is a positive step towards combatting money laundering through cryptocurrencies.