India imposes anti-money laundering regulations on crypto industry

India imposes anti-money laundering regulations on crypto industry

India is taking a significant step towards regulating the cryptocurrency industry by extending the Prevention of Money Laundering Act (PMLA) to cover digital assets.

The move will require cryptocurrency exchanges in India to conduct due diligence on transactions and report suspicious or high-value transactions to authorities, as the nation expands its anti-money laundering laws to digital assets.

Prior to this, Indian crypto exchanges usually provided transaction information when requested by the authorities.

The PMLA will now cover exchanges between digital assets and fiat currencies, exchanges between one or more forms of digital assets, transfer of digital assets, custody or administration, as well as participation in and provision of financial services related to the sale of a virtual digital asset (VDA ).

Rajagopal Menon, the vice president of WazirX, India’s largest cryptocurrency exchange by trading volume, called these changes “baby steps” toward regulation.

“Governments realize that we need to formalize this industry while we wait for a comprehensive law. And this is not a small industry anymore [with] a lot of big money at stake,” Menon told Discard.

India’s economic crime-fighting agency, the Enforcement Directorate, has investigated at least 10 crypto exchanges for alleged money laundering, including WazirX and Binance, as well as individuals defrauding investors of their money and allegedly transferring illegal profits to foreign accounts.

India’s Finance Ministry said on Monday that the Enforcement Directorate is investigating “several cases” related to cryptocurrencies, under the provisions of the PMLA and the Foreign Exchange Management Act. So far, proceeds of crime of around $115.7 million have been seized while five people have been arrested on money laundering charges.

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To gain clarity

Crypto exchanges meet Indian authorities to iron out the process and clarify doubts.

“All detailed manuals, instructions and the processes to be followed will be refined in follow-up meetings with India’s finance ministry,” Menon said Discard.

Crypto exchanges may also be needed to provide more detailed information, Menon said. Some of the top crypto exchanges in India have been self-regulating and adhered to anti-money laundering norms, including providing detailed know-your-customer information and back-checking and validating all documents from customers.

“We have been voluntarily doing these matches for a while now, but happy to see that this has now been made law,” Sumit Gupta, co-founder of CoinDCX, India’s first crypto unicorn, said on Twitter.

“We’ve been looking for a way to share data with [Financial Intelligence Unit-India] for a while now. My team and I are still looking at the fine print, such as the inclusion of the transfer of VDAs,” said Gupta.

The inclusion of VDA transactions in the PMLA is a positive step to recognize the sector and will strengthen the collective efforts of crypto exchanges to prevent VDAs from being misused by bad actors, according to Ashish Singhalco-founder of the crypto exchange CoinSwitch.

Regulations on prohibitions

India has long viewed digital assets with suspicion, going so far as to impose a 30% flat tax on all crypto income and a 1% tax deducted at source (TDS) on all crypto trades above 10,000 Indian rupees (US$121). The South Asian nation also does not allow crypto traders to offset losses against gains, and imposes a penalty equal to TDS for non-deduction, interest at 15% annually for late payment, and even imprisonment.

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According to the Esya Centre, a technology policy think tank in India, about $3.8 billion of digital assets may have moved to offshore crypto exchanges from India between February and October 2022 as traders tried to avoid tax charges.

India, the current president of the Group of 20 (G20), aims to regulate the crypto industry instead of imposing a complete ban as proposed by the country’s central bank, the Reserve Bank of India.

The global Financial Stability Board (FSB), an international body that monitors and makes recommendations on the global financial system, is expected to make recommendations on the markets and activities of cryptoassets by July, according to the G20 leaders’ summary and outcome document.

The International Monetary Fund and the FSB’s joint paper on integrating the macroeconomic and regulatory perspectives of cryptoassets is expected in September.

“The G20 discussion is part of a wider exercise that involves getting consensus from governments from around the world on crypto regulations. It’s only a matter of time before you get serious laws in place governing crypto,” Menon said.

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