Centre brings Crypto under PMLA | 11 Mar 2023

Prelims: Crypto Currency, PMLA, ED, Virtual Digital Assets.

Mains: Crypto under Money Laundering Act.

The Union Ministry of Finance, through a gazette notification, has brought Virtual Digital Assets (VDA) or the Crypto Currency under the Prevention of Money Laundering Act (PMLA).

Need:
- Cryptocurrency transactions continue to lack transparency and the trail is difficult to establish.
  - This moves pushes responsibility on the cryptocurrency markets to bring transparency to cryptocurrency trading.
- In the digital era of finance, compliance is a must not just to safeguard interest of investors but also of the country and in this aspect the crypto industry is becoming increasingly important, governments and regulators around the world are paying closer attention to this rapidly evolving space.
- The measure is also expected to aid investigative agencies in carrying out action against crypto firms.
Norms:
- VDA service providers / businesses have now become the ‘Reporting Entities’ under PMLA Act, and they have to follow similar reporting standards and KYC norms as the other regulated entities like banks, securities intermediaries, payment system operators, etc.
Activities covered under PMLA:
- Exchange between virtual digital assets (VDA) and Fiat Currencies.
- Exchange between one or more forms of VDAs
- Transfer of VDAs
- Safekeeping or administration of VDAs or instruments enabling control over VDAs.
- Participation in and provision of financial services related to an issuer’s offer and sale of a VDA.

The notification does not offer entities time to adhere to the fresh norms. The Crypto industry is also concerned that in the absence of a central regulator, crypto entities could end up dealing directly with enforcement agencies like the Directorate of Enforcement (ED).
17 lakh users Indian VDA users have switched from domestic centralized VDA exchanges to foreign counterparts since the announcement of the tax regime in the Union Budget in February 2022
- Indian crypto traders have moved over USD 3.8 billion in trading volume from local exchanges to international crypto platforms.
This is likely to lead to a large negative impact on tax revenues, as well as a decrease in transaction traceability— which defeats the two central goals of the extant policy architecture.
The downside impact of the VDA tax architecture is likely to further accentuate capital outflow and deter international investors.

In the Union Budget 2022-23, even though the government brought in a tax for cryptocurrencies, it did not proceed with framing regulations.
Earlier, the Reserve Bank (RBI) of India had proposed a ban that was set aside by Supreme Court order.
In July 2022, flagging the RBI’s concerns, the finance minister told Parliament that “international collaboration” would be needed for any effective regulation or ban on cryptocurrency.
From April 2022, India introduced a 30% income tax on gains made from cryptocurrencies.
- In July 2022, rules regarding 1% tax deducted at source on cryptocurrency came into effect.

If there are laws and guidelines against crypto laundering, investors will have the fear of being penalized. To make things more streamlined, exchanges in India must track transfers made by investors within a tax year exceeding a certain amount and report the same to the tax authorities.
To overcome the impact of VDA tax architecture, the Government should adopt a progressive tax structure with differentiated rates for short-term and long-term gains, in line with international best practices.
- A new tax regime pertaining to VDA was announced in 2022, switching users from domestic to international counterparts, which furthered the capital outflow.