Virtual Digital Assets ('VDA') Brought under the Purview of PMLA

In a recent notification (Notification bearing no. S.O. 1072(E) dated 07.03.2023 (“the Notification”)), the Ministry of Finance has expanded the scope of the Prevention of Money Laundering Act, 2002 (PMLA) to essentially include all cryptocurrency transactions. This amendment has been made to effectively monitor transactions involving Virtual Digital Assets (“VDA”) and combat money laundering. The notification specifies various activities that now fall under the purview of the Prevention of Money Laundering Act, 2002 (“PMLA”) such as exchanging VDAs for fiat money, exchanging different types of VDAs, transferring VDAs, storing or managing VDAs or related tools, and providing financial services associated with VDA offerings.

The Notification has been issued in exercise of powers conferred under section 2(1)(sa)(vi) of the PMLA. Section 2(1)(sa) of the Prevention of Money Laundering Act, 2002 defines person carrying on designated business or profession and sub clause (vi) of the section includes “person carrying on such other activities as the Central Government may, by notification, so designate, from time to time.”

To define the term “virtual digital asset”, the notification refers to clause (47A) of section 2 of the Income-tax Act, 1961. According to this definition, VDA includes any digital representation of value, generated through cryptographic means or otherwise, that functions as a store of value, unit of account, or medium of exchange in financial transactions. It encompasses Non-Fungible Tokens (“NFT”) and any other digital assets specified by the Central Government.

In addition to this the government has introduced the PMLA (Maintenance of Records) Amendment Rules, 2023 (“Rules, 2023”) vide notification S.O. 1074(E) dated 07.03.2023, which make it mandatory for the entities engaged in VDA trading to verify the identities of their clients and the beneficial owners.

Recent measures to regulate VDAs:

• In the context of regulating cryptocurrencies, the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was introduced in Parliament to provide a framework for official digital currencies issued by the Reserve Bank of India (RBI). However, no further action has been taken on this bill, and it remains pending.

• Although there is no specific legislation governing or prohibiting cryptocurrency dealings in India, recent comprehensive measures have been implemented to regulate these assets. These measures include levying a 30% income tax on transfer of VDAs1 and further making such transfers liable for deduction of Tax Deducted at Source (“TDS”). Failure to comply with these TDS obligations attracts penalties under the Income-tax Act2.

• The rise of cryptocurrencies has also introduced new challenges in combating money laundering due to their decentralized nature and inherent anonymity. Consequently, the recent notification brings activities related to VDAs under the purview of the PMLA.

The Impact:

• The notification has significant implications for the cryptocurrency industry. VDA service providers, such as cryptocurrency exchanges and traders, are now considered “Reporting Entities” under the PMLA. They must adhere to the same Know Your Customer (KYC) procedures, anti-money laundering regulations, and due diligence standards as banks. Additionally, they are required to submit suspicious transaction reports to the Financial Intelligence Unit (FIU) for investigation. This also means that now the suspicious cryptocurrency transactions will thoroughly be investigated as potential “proceeds of crime”.

• Once a complaint is received, the FIU initiates an investigation, gathering transactional information and conducting analysis. In cases of suspicious transactions, the FIU alerts the Enforcement Directorate. Based on the complaint received, the Enforcement Directorate, responsible for enforcing the provisions of the PMLA, may conduct searches and seizures of suspected assets under the relevant sections.

• In summary, these measures aim to enhance transparency, prevent illicit activities, and safeguard investors in the cryptocurrency market. They establish a more secure environment for cryptocurrency transactions in India. It signifies an inclination towards regulating the cryptocurrency industry instead of implementing a complete ban, which is a progressive measure.

*Authored by Prashant Singh, Advocate at Metalegal Advocates. The views are personal and do not constitute legal opinion. *