As PMLA tightens grip on crypto, it’s how other nations regulate VDAs

The Finance Ministry’s decision on March 7 to place Virtual Digital Assets (VDA), which includes cryptocurrencies and non-fungible tokens (NFTs), under the Prevention of Money Laundering Act (PMLA) will introduce a layer of compliance for firms involved in the cryptocurrency industry.

Crypto entities will be obliged to record transaction and client data, monitor compliance and report suspicious activities while empowering the Enforcement Directorate (ED) to investigate suspected crypto-related financial wrongdoing. In addition, Finance Minister Nirmala Sitharaman last year introduced a flat tax of 30 percent on profits from the transfer of crypto-assets and NFTs.

As India strengthens its regulatory framework over the cryptocurrency sector, here is a list of countries that have taken a chance to address this complex issue.

Australia: With the market size of its crypto exchange industry reportedly pegged at $58.9 million, crypto assets, which are or form part of an investment or exchange-traded product, require an Australian Financial Services License (AFSL) under applicable financial services. services regime under the Limited Liability Companies Act (2001). Companies involved in the crypto sector must report suspicious transactions, comply with the Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regimes to limit financial and terrorist crimes from the crypto industry,

Russia: In July 2020, Russian President Vladimir Putin issued a Digital Financial Assets (DFA) regulation that legalized cryptocurrency transactions. However, cryptocurrencies are banned from exchanging goods and services in the country. Last year, the Central Bank of Russia (CBR) reiterated its stance and recommended a ban on cryptocurrencies, citing them as risky. The Russian Ministry of Finance has been pushing for crypto regulations.

China: The government of Asia’s largest economy has cracked down on cryptocurrencies and cryptomining in recent years. In 2017, the country sanctioned crypto trading and banned platforms from offering an ICO (Initial Coin Offering). Similar to a stock market initial public offering (IPO), an ICO enables a company to issue a cryptocurrency token that represents a stake in a company or project. In 2021, Chinese regulatory bodies banned all trading and transactions involving crypto. But while the government banned forms of crypto trading, Chinese residents who already hold forms of cryptocurrency, such as Bitcoin and Ethereum, are not breaking any existing laws.

United States: In the United States, agencies such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), the Internal Revenue Service (IRS), the Financial Crimes Enforcement Network (FinCEN), and the Comptroller of the Currency (OCC) engages in regulations related to the crypto industry. Regulation of crypto activities is a complex and tough nut to crack in the US with several prevailing challenges. For example, regulators such as the SEC and CFTC have attempted to categorize cryptocurrency jurisdiction as a security, commodity, or currency.

The SEC regulates the issuance or resale of all tokens and digital assets it considers securities. Tokens issued in an ICO will be regulated under the Securities Act, which oversees the sale and distribution of securities in the market. In addition, the Financial Crimes Enforcement Network (FinCEN) regulates money services businesses (MSBs) that are authorized to issue a token (administrator) or are engaged in the exchange of virtual currencies (exchangers) under the Banking Secrecy Act (BSA) and FinCEN regulations. This regulation deals with money laundering and the financing of terrorist activities. Additionally, while balancing the opportunities and risks associated with the crypto industry, the Biden administration issued an Executive Order (EO) titled “Ensure Responsible Development of Digital Assets” in March 2022 that outlined strategies to address the rise of digital assets in the country. The EO has emphasized the need to protect investors, combat illegal financing, achieve financial stability and pursue responsible innovation in financial businesses.

United Kingdom: Following the implosion of FTX, a now-bankrupt cryptocurrency exchange, the UK Chancellor of the Exchequer presented a set of rules aimed at regulating the sector in February 2023. Crypto firms must be registered with the Financial Control Authority (FCA), the United Kingdom’s financial regulatory body that oversees with financial services, including crypto firms. UK-based crypto firms require a license and minimum capital and liquidity requirements to operate in the country. The latest regulation covers several crypto-related processes such as arranging agreements, mining transactions, managing crypto platforms and executing transactions. The government aims to protect the UK’s financial stability and market integrity, encourage growth and innovation in the sector, and warn investors about the risks associated with the industry. Crypto firms in the UK must comply with the Funding and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLR”) while operating businesses engaged in crypto exchange and wallet services in the UK to prevent illegal activities such as money laundering and terrorist financing.

Brazil: In December 2022, former Brazilian President Jair Bolsonaro approved a bill regulating crypto payments in the country. Classifying crypto-related financial offenses as “fraud involving virtual assets,” it also mandated firms to hold a “virtual service provider” license. According to the law, crypto is considered a digital representation of an asset with the ability to be traded or transferred electronically and used for payments or investments. In addition, the law places crypto firms under the ambit of regulations aimed at curbing money laundering, terrorist financing and the proliferation of weapons of mass destruction (WMDs). Companies involved in the crypto industry will have 180 days to comply The Securities and Exchange Commission of Brazil (CMV) will regulate crypto-assets that are considered securities under the new law.

Kingdom of Saudi Arabia: One of the largest economies in West Asia, the Kingdom of Saudi Arabia (KSA) does not recognize cryptocurrencies as legal tender. In 2018, the country banned transactions involving cryptocurrency. While the KSA has a thin regulatory approach to these cryptocurrencies, the Saudi Central Bank and Ministry of Finance have warned its citizens against engaging in or investing in virtual currencies. The country has maintained the nature of cryptocurrency-based transactions as illegal, but has not set penalties for individuals trading in crypto. Despite similar warnings, small businesses and merchants continue to accept bitcoin.

In addition, there is a religious influence on the Saudi Arabian central bank’s overall positioning regarding cryptocurrencies. Islamic scholars claim that trading in virtual currencies is akin to gambling and is ultimately haram. But to keep up with global crypto market trends, the country is also working with the United Arab Emirates (UAE) to attract crypto companies.

Nigeria: To legitimize operations in the country, crypto companies offering products and services need a Virtual Asset Services License (VASP) and a Digital Asset Exchange License that authorizes the trading, exchange and transfer of virtual assets. The Central Bank of Nigeria (CBN) and the SEC had different views on crypto regulation in the African country. While the Central Bank of Nigeria sought to ban crypto-based transactions in the country’s financial institutions citing its unregulated and high-risk nature, the SEC moved to regulate it, stressing that crypto investments qualify as transactions in securities. In addition, the SEC can access an exchange’s records, including weekly and monthly transaction details and annual financial compliance reports. Crypto exchanges that wish to raise funds via an ICO must follow a compliance measure set by the digital assets offering platform (DAOP), which will ensure due diligence, provide investors with the latest information about projects, and track whether projects are using funds for purposes stated in their white paper. Despite being a lower-middle-income country, Nigeria ranks 11th in the Global Crypto Adoption Index published by blockchain analysis organization Chainalysis.

Germany: Germany’s market regulator, the Federal Financial Supervisory Authority (BaFin), classified cryptos as ‘units of account’. BaFIN authorized crypto exchanges and platforms with a license to operate in the country. The Bundestag, the German legislature, has reformed the national regulatory rules for crypto-related activities given the Fifth Anti-Money Laundering Directive (AMLD5). In Germany, cryptoassets can be defined as the digital representations of value that are not guaranteed by a central bank or a public authority, that do not constitute the legality of a currency and are accepted as means of payment, serve investment purposes, and can be stored or transferred electronically. Moreover, in order to operate in the country, firms engaged in the crypto market require a German license with BaFIN.