India is taking a big step in recognizing and regulating cryptocurrencies. In a recent notice, the regulatory commission in the country notified all entities involved in the crypto space, including exchanges, transfers, financial services such as insurance, and NFTs, to comply with the Prevention of Money Laundering Regulations Act in the country.
The legality of this action is that all companies operating in the crypto space within the country will now have to comply with KYC and Anti-Money Laundering laws, such as providing IDs at registration and filing returns and keeping records of all transactions.
Legalities
The Enforcement Directorate (ED) noticed issues with certain stakeholders in the virtual assets industry not following proper due diligence procedures and not reporting suspicious transactions related to money laundering or financing terrorism. The ED had acted on this before receiving additional powers or authority related to AML/CFT in the virtual assets industry.
However, before this, the ED had taken suo moto cognizance, meaning they had taken notice of the issues themselves without being prompted by an outside party, of the lack of Enhanced Due Diligence and the failure to raise Suspicious Transaction Reports (STR) against various stakeholders in the Virtual Assets (VA) Industry.
The notification issuance goes above and beyond just a declaration as it has strengthened the Enforcement Directorate to bring clarity to the virtual assets industry, and the act provides crypto users in the country with special courts they can visit concerning virtual digital assets in case disputes arise.
There are a lot of pending cases related to money laundering and terrorism financing in India that haven’t been resolved for two years. Some people suggest that the courts should start hearing cases related to the virtual assets industry, but there are better ideas than this because it puts immense pressure on the courts and makes it hard to handle all the cases.
Instead, it might be better to set up a regulatory body to oversee the virtual assets industry and create clear rules and regulations for how things should work. This regulation is what the UAE has done, and it has worked well. They created a Virtual Assets Regulatory Authority (VARA) that has made rules for how the industry should operate and what companies need to do to follow the law.
The Challenge
Applying the requirements of the Money Laundering Act to virtual or digital assets could increase the costs of due diligence, audit, and compliance for financial service providers, wallets, and exchanges. However, this could also help eliminate illegitimate players and regulate the crypto industry.
The challenge is that the decentralized nature of the assets makes it difficult to identify and regulate those involved in buying and selling them. In addition, many exchanges and wallet providers operate anonymously, which makes it challenging for authorities to trace transactions and monitor the industry.
For regulators to address this, proactive measures like integrating compliance and auditing protocols can be taken without compromising the decentralized nature of VDAs. Moreover, these actions could benefit the industry long-term by encouraging only legitimate players and protecting users from fraud and predatory behavior.
The Indian government is actively engaging in discussions with G20 policymakers and central bank governors regarding VDA industry regulations at the global level. In addition, India has urged the IMF and FSB to work on a joint paper to help countries create comprehensive crypto policies.