There are two regulatory touch points within a crypto ecosystem that can be leveraged to enforce and implement regulation — at the time a crypto asset is converted to fiat currency and the functioning of intermediaries.

The recent amendments to the Prevention of Money Laundering Act, 2022, (PMLA) seeks to use these touch points as the basis for regulation. The set of transactions that have been brought under the scope of the PMLA include (i) exchange between virtual digital assets and fiat currencies; (ii) exchange between one or more forms of virtual digital assets; (iii) transfer of virtual digital assets; (iv) safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; and (v) participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.

Transactions involving exchange between two virtual digital assets may be more difficult to monitor but oversight over conversion of crypto assets to fiat currency and the regulation of intermediaries is more realistic.

As a result of this amendment, intermediaries operating in the crypto ecosystem such as crypto exchanges, wallets, and other service providers will need to implement PMLA controls and systems such as KYC checks when onboarding customers, retain customer data for prescribed periods, monitor and report suspicious transactions as “reporting entities” and have policies in place for transaction tracing.

Many crypto exchanges in India were already (voluntarily) complying with certain baseline KYC norms, but a uniform standard for all market players is useful. Banks will need to implement detailed safeguards and checks when enabling payments for virtual digital assets.

Bringing transactions in virtual digital assets within the scope of the PMLA will play a critical role in fraud control and strengthening confidence of investors, retail consumers and financial markets in the crypto economy.

Trading in crypto assets or currencies will now be closer to trading in securities over regulated exchanges and platforms in terms of KYC and onboarding procedures.

These amendments to the PMLA do not, however, in any way legitimize or legalize private cryptocurrencies. There is still a need for a comprehensive legislative framework for virtual digital currencies, which should also ideally provide for a market regulator for the crypto ecosystem and a need to regulate intermediaries. The industry is wary that without such a centralized market regulator, investigative agencies (like the enforcement directorate) could become the primary watchdog for the crypto economy.

As these rules are implemented and enforced, it may send a signal to financial regulators that effective regulation of transactions in private crypto assets is possible and a ban is not warranted.

Bringing transactions in virtual digital assets within the scope of the PMLA also aligns the Indian legal framework with global efforts to regulate trading in crypto assets. This is particularly useful given that ultimately, a global coordinated effort is the only way to effectively regulate the crypto ecosystem, which seamlessly cuts across sovereign borders.

This article was originally published in The Economic Times on 21 March 2023 Written by: Shilpa Mankar Ahluwalia, Partner. Click here for original article

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