PMLA Covers a Windfall for Crypto

Over the past few years, digital assets and cryptocurrencies have become mainstream, with increasing trading volumes, entry of new players and exchanges into global and Indian markets, increased surveillance of law enforcement, the emergence of a global dialogue on the preferred means of recognition and regulation of digital assets, Central Discourse related to banking digital currency (CBDC), and of course, recent developments around certain exchanges and widely traded digital currencies. India is said to be one of the world’s top three digital asset markets.

The concern of governments and regulators has globally expressed concerns about digital and crypto assets revolving around anonymity as well as those assets circumventing age-established financial transaction oversight frameworks such as anti-money laundering. (AML), Financial Terrorism Control (CFT), Tax Evasion, Exchange Control Rules, Customer Identification (KYC), Suspicious Transaction Monitoring, Record Keeping and Reporting . The Financial Action Task Force (FATF), Bank for International Settlements (BIS), Organization for Economic Co-operation and Development (OECD), and global regulators, such as those in the United States and United Kingdom, as well that the March 9, 2022 Biden Order helped build global and national consensus on balancing the benefits of emerging crypto technology against the risks to the financial order stemming from “bad actor” concerns, considering the use and trading of Virtual Digital Assets (VDAs), as they are now popularly known.

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In India, we had a series of warnings issued by the Reserve Bank of India (RBI) in 2013 and 2017, followed by RBI’s cryptocurrency ban circular of April 6, 2018 which was challenged and overturned by the Supreme Court in March 2020. This has been the catalyst for the hockey stick growth of India’s digital and crypto assets sector from 2020 to date.

Issues or risks related to mis-selling, misleading advertisements promising assured returns, speculative losses, data incidents, relocation of proceeds of crime, and illegal elements using crypto-assets have also increased. As a countermeasure, India has been working on a cryptocurrency bill. Several drafts of the same, although pending the implementation of a global consensus, have rightly been postponed. All of this led to the Indian government bringing VDAs into the fold of income tax law last year by levying a 30% tax on gains made through VDA transactions and a withholding requirement. at source (TDS) by 1%, which led to lower trading volumes, as expected. The new VDA definition provided oversight of sovereign transactions, identification of the actors involved, better understanding of the benefits and risks of digital assets, and was hailed as a positive step.

However, the main concern the industry still faced was the scrutiny of law enforcement, including through requests for information under the Code of Criminal Procedure, the Prevention Act 2002 Money Laundering (PMLA) and Rules, and Foreign Exchange Management Act (FEMA), given the lack of a statutory reporting framework in India for the crypto-asset sector, as only “ reporting entities”, such as banks, financial institutions, authorized intermediaries and certain notified activities such as casinos, real estate and the gemstone / jewelry sector were required and eligible to legally comply with customer identification / KYC , transaction monitoring, record keeping and reporting requirements under the PMLA.

In a historic move, on March 7, 2023, the Department of Revenue, Department of Finance, issued a notification under the PMLA, notifying certain types of VDA activities as “persons engaged in a designated occupation or profession”, qualifying the sector as “Entity Reporting” (RE). This will provide much-needed legitimacy to Indian, and even global, crypto players, as well as crypto-assets and the digital ecosystem by providing greater transparency and state oversight of the sector from an AML perspective/ FT and tax management and disposal. unserious and bad actors.

The Financial Intelligence Unit-India (FIU-IND), in late 2022, revised its reporting user manual and introduced FinGate 2.0 to include the data reporting format for younger business models such as payment aggregators (now under license from RBI). However, this report format and other existing report formats under PMLA do not provide a reporting mechanism for VDA players. Clarification on this would be helpful. The impact on offshore exchanges of crypto and digital assets is also unclear, given the jurisdictional challenges, although foreign entities licensed by RBI/Sebi are covered as “reporting entities” under the PMLA, and it can be difficult to make territoriality arguments to avoid reporting by global exchanges targeting Indian users. The nature of VDAs and the emerging Web3 ecosystem is inherently cross-border, both in terms of exchange domiciliation and trading counterparties. It would be interesting to see the outcome of the ongoing proceedings in the PayPal/FIU High Court in Delhi. It would also be helpful to clarify how crypto exchanges are supposed to report VDA transfers covered in the notification, which do not involve actual fiat/cash payments.

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While this development by no means implies sovereign recognition of the industry, the air will only clear once the cryptocurrency bill moves forward. The notification is a positive step and was eagerly awaited by the Indian Web3/VDA industry and in the future it will open up a formal channel between the VDA industry and government/law enforcement agencies, which has been missing so far. The PMLA umbrella is wide. As the industry, both in India and abroad, adjusts to compliance standards similar to banks and securities markets; open communication with authorities would be essential for monitoring and reporting under the PMLA, as VDA actors learn the ropes, given the breadth and scope of the PMLA.

The authors are, respectively, partner and senior partner, Cyril Amarcand Mangaldas