by Noah Roy, investment analyst at Sino Global Capital
On March 7th, the Ministry of Finance released an official gazette announcing that the Government of India has included cryptocurrency and other virtual digital assets (VDAs) under the Prevention of Money Laundering Act 2002 (PMLA) provisions. As a result, businesses in India offering crypto or virtual assets services such as exchanges, custodians, and wallet providers are now classified as "reporting entities" under the PMLA, giving them the legal status to report suspicious transactions. KYC norms have also become a legal obligation for crypto businesses, replacing the previous best practice status.
What is the PMLA?
The PMLA was introduced by the Indian government in 2002, requiring financial institutions like banks and other intermediaries to maintain KYC records of their customers and report any suspicious activity to the Enforcement Directorate (ED), which investigates such offenses. Additionally, the Financial Intelligence Unit – India (FIU-IND) under the Department of Revenue, Ministry of Finance serves as the central national agency responsible for processing and disseminating information on suspicious financial transactions.The objectives of the Prevention of Money Laundering Act (PMLA) include preventing and controlling money laundering, confiscating and seizing property involved in or derived from money laundering, and implementing punishment to offenders. The act also establishes an adjudicating authority and appellate tribunal to handle money laundering matters, requires the maintenance of records, and imposes obligations on financial institutions, banking companies, and other institutions to address all issues related to money laundering.
What does it mean for crypto exchanges?
All crypto businesses which support one or many of the above activities like exchanges, wallets, payment intermediaries etc will now have to act as “reporting entities” and report any suspicious activity to the government/ED. Like banks, crypto businesses now need to maintain records of any transactions more than INR 10 Lakh (~12,200 USD) in value for five years along with AML policies in place too. This means that all crypto businesses and entities will need to perform and report:
Know your transactions (KYT)
Transactions monitoring & reporting
Address screening & reporting
Suspicious activity reports (SARs)
Suspicious transaction reports (STRs)
The increased scrutiny will help weed out bad actors and will strengthen the collective efforts of the industry to prevent misuse of crypto through money laundering or other illegal activities and bring more legitimacy to the industry in the eyes of the public.
The latest gazette supports the central government's goal of regulating the VDA sector instead of imposing a complete ban, which is a positive development. It will be intriguing to observe how VDA businesses adapt their services to fulfill PMLA requirements without any industry-specific regulator overseeing their actions. Overall, this move has strengthened the governance of VDA service providers and businesses, resulting in increased transparency and regulation in the web3 industry that was previously subject to regulatory ambiguity.