MC Explains | Crypto assets log in to money laundering provisions. What does it mean?

The finance ministry brought crypto and virtual assets under the money laundering provisions through a circular issued on March 7.

The circular brings transactions involving exchanges, transfers and safekeeping of crypto assets under the Prevention of Money Laundering Act 2002 (PMLA).

Here's an explainer that will tell you more on this.

According to the gazette paper issued by the government, Indian crypto exchanges will now be required to report any suspicious activity to the Financial Intelligence Unit-India (FIU-IND). The notification also mandates that crypto exchanges and intermediaries dealing with virtual digital assets (VDAs) must have proper KYC documentation for all customers they onboard.

It mandates entities dealing in crypto assets to follow KYC, anti-money laundering regulations and due diligence as followed by banking and other financial entities which fall under the classification of reporting entities under PMLA.

The circular was needed primarily to help investigative agencies carry out their actions against crypto companies, as the Enforcement Directorate (ED) and the Income Tax Department (I-T) have been probing many cases against companies running cryptocurrency exchanges and transactions.

"Crypto's usage in money laundering is an established fact, therefore, a stringent regulation such as PMLA was very much needed," says Sharat Chandra, Co-Founder of India Blockchain Forum.

The ED had on August 5 conducted searches at the premises of one of the directors of Zanmai Labs Private Limited, which owns and operates cryptocurrency exchange platform WazirX. It has frozen bank assets worth Rs 64.67 crore. The central agency took action against the WazirX director for assisting the accused instant loan app companies in the laundering of fraud money through the purchase and transfer of virtual crypto assets.

The ED had issued a show-cause notice to WazirX and its two directors Nischal Shetty and Sameer Mhatre earlier on June 11 for allegedly violating guidelines in connection with transactions worth Rs 2,790.74 crore.

The Reserve Bank of India has so far cautioned people against crypto assets. In January, RBI Governor Shaktikanta Das said crypto was a poor gambling and will even undermine the power of the central bank if allowed to grow unchecked. “If crypto is allowed in India, the RBI will lose control over monitoring transactions," Das said at an event in Mumbai, adding that it doesn’t have any underlining assets. Crypto masquerading as a financial asset is a completely misplaced argument, he said.

Finance Minister Nirmala Sitharaman on February 13 said a standalone country's effort to control and regulate cryptocurrencies will not be effective as it is completely driven by technology. "Whether it is the crypto mining, assets or transactions, we recognise that it's completely driven by technology and a standalone country's effort in controlling and regulating it is not going to be effective," Sitharaman said in the Lok Sabha.