This article is a deep dive into the recent decision by India’s Ministry of Finance and its impact on Virtual Digital Assets (VDAs) businesses and service providers. We’ll look into the implications of extending the Prevention of Money Laundering Act (PMLA) Act of 2002 to activities related to VDA and cryptocurrency, analyze the coverage of VDAs under PMLA 2002, and understand the importance of this move, among others.
Extension of Anti-money Laundering Provisions to Virtual Digital Assets
In a significant update, the Ministry of Finance has broadened the scope of the Prevention of Money Laundering Act (PMLA) Act of 2002 to include activities linked to Virtual Digital Assets (VDA) and cryptocurrency. This extension covers various activities such as exchanges between VDAs and government-approved fiat currencies, transfers of VDAs, safekeeping or administration of VDAs, plus participation in and provision of financial services connected to a VDA issuer’s offer and sale.
The Role of the Financial Intelligence Unit-India
These changes mean that businesses involved in VDA now need to register as reporting entities with the Financial Intelligence Unit-India (FIU-IND). The FIU-IND, established in 2004 under the Finance Ministry, mirrors the role of the USA’s FinCEN. Its primary function is to receive, analyze, and distribute information regarding suspect financial transactions. Platforms like CoinSwitch are now obliged to implement know your customer methodology, monitor all transactions closely, and report any suspicious activity to the FIU-IND.
In Line with Global Guidelines
This move is in line with guidelines set out by the International Monetary Fund (IMF) and the Financial Action Task Force (FATF). The FATF provides a comprehensive definition of Virtual Asset Service Providers (VASPs), covering intermediaries, brokers, exchanges, custodians, hedge funds, and mining pools. These guidelines recognize the instrumental role VASPs play in regulating and monitoring the virtual digital assets ecosystem.
The Significance and Concerns of This Move
Banks, financial institutions, and certain intermediaries in the securities and real estate markets already adhere to these rules. The extension to virtual digital assets offers a framework for VDA platforms to monitor and take actions against malpractices diligently. While this regulation is seen as a positive move towards transparency and confidence-building, concerns persist. The absence of a central regulator could result in VDA entities dealing directly with enforcement agencies, potentially discouraging international players and causing a capital outflow.
Introduction of Taxation on Virtual Digital Assets
In the 2022-23 Union Budget, new provisions were introduced aimed at taxing and tracking Virtual Digital Assets (VDAs). The government defined virtual digital assets in the newly inserted clause (47A) under Section 2 of the Income Tax Act, 1961. From April 2022, a 30% income tax on gains made from cryptocurrencies was introduced.
The Way Forward for VDAs
India should reconsider its high tax rates on virtual digital assets, which are currently higher than other asset classes. Aligning virtual digital assets taxes with other asset classes could help reduce tax arbitrage and promote economic growth. Many countries have established frameworks for the licensing of VASPs, such as Japan and South Korea. In Europe, the European Parliament has passed the Markets in Crypto-Assets (MiCA) regulation. With this progressive regulatory framework, India could establish a leadership position in digital assets. However, effective legislation requires significant international collaboration to evaluate the risks, benefits, and standards.