Crypto, Digital Assets Trade To Fall Under Money Laundering Guidelines

The Government of India has brought trading cryptocurrency and other virtual digital assets (VDAs) under the Prevention of Money Laundering Act (PMLA) provisions, 2002, in a notification issued on March 7, 2023 (Tuesday).

From the date of the notification, the following activities related to cryptocurrency have been brought under the ambit of PMLA.

• The exchange between virtual digital assets and fiat currencies
• The exchange between one or more forms of virtual digital assets
• The transfer of virtual digital assets
• The safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets
• The participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset

In other words, trading crypto for fiat currencies, exchanging one crypto with another and transferring VDAs between two persons or legal entities is to be considered under the provisions of the money laundering act.

The notification has also brought crypto exchanges within the definition of ‘reporting entity’ within the meaning of Section 2(wa) of the PMLA.

The Section defines a reporting entity as “a banking company, financial institution, intermediary or a person carrying on a designated business or profession,” implying that all such entities working with crypto, NFTs and other VDAs would be included.

Therefore, crypto exchanges will now have to maintain records and present them to the government as and when required.

Added Regulatory Burden For Crypto Exchanges

Under Chapter IV of the money laundering act, crypto exchanges would now be required to maintain a record of all transactions. The exchanges would have to store the data in such a manner that it can reconstruct individual transactions.

The crypto exchanges would also be required to conduct enhanced due diligence, as prescribed under Section 12, sub-section 1 of the PMLA. 

This includes the verification of the identity of the clients, taking additional steps to examine the ownership and financial position, including sources of funds of the client and recording the purpose behind conducting the transaction and the nature of the relationship between the parties.

Further, if the transaction parties were unable to provide details to satisfy the requirements of the aforementioned sub-section, the crypto exchanges would have to stop the transaction from going through.

The exchanges would also have to step up the scrutiny of a user if the said user has made transactions that might be considered suspicious or are likely to involve proceeds of crime.

Crypto exchanges would be required to store the information gathered from the transaction parties for up to five years after the transaction has been completed.

The move also empowers the government to access the information stored by crypto exchanges at any point in time.

The move comes when a crypto winter is in full swing across the world. Coupled with increased scrutiny and regulations from Indian and international bodies such as the IMF alike, India’s crypto industry has been struggling.

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