Crypto under PMLA: New rules of the game

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The central government has tightened regulatory control over virtual digital assets, more commonly known as cryptocurrencies. According to a notice in the official gazette, the government has ordered that a host of business activities on these assets will now be covered by the Prevention of Money Laundering Act (PMLA). In other words, in the future, exchanges between cryptocurrencies and fiat currencies or between cryptocurrencies and other such services may be reviewed by agencies such as the Enforcement Directorate. of Laws (ED) and the Department of Income Tax. This move should be considered in light of governments’ efforts to subject cryptocurrencies to stricter regulation. In April 2022, for example, the government introduced a 30% income tax on gains made from cryptocurrencies. Later in July 2022, the government introduced rules regarding the 1% withholding tax on cryptocurrency. Generally speaking, more regulation of cryptocurrencies is desirable.

The starting point for this regulation is the decision of governments not to accept cryptocurrencies as currencies and instead treat them as virtual digital assets. This lack of recognition strikes at the heart of what cryptocurrencies essentially aim to do: provide an alternative to regulated currencies. The fundamental purpose behind cryptocurrencies and their appeal is that they are designed to circumvent the financial system and existing regulation. As such, they aim to avoid being tracked down, confiscated or frozen by governments. What makes them effective in this area is that they are anonymous and, since they work on the Internet, are not bound by physical boundaries. But these features also pose several risks to any economy. On the one hand, in the absence of regulation, they can evade minimum prudential standards such as know-your-customer regimes, anti-money laundering (AML) rules and combating the financing of terrorism ( CFT), etc. Each of these loopholes increases the chances of cryptocurrencies being used for a range of criminal behavior. Without effective regulation, an even bigger problem arises: the question of monetary sovereignty. Since these private currencies are often pegged to the US dollar, with greater use they not only replace the Indian rupee, but could also lead to further dollarization of the Indian economy, even if the monetary and fiscal authorities (read the RBI and the government, respectively) are losing control.

The governments decision is in line with most regulators and policy makers around the world. For some time now, the IMF has been advocating a global architecture for the effective regulation of these assets, because they cannot be contained by neat geographical divisions. However, as the reports in this article show, industry entities are concerned about the lack of time given to them to comply with the new standards. Moreover, in the interest of effective regulation, the government must decide on a full-time regulator for this sector as soon as possible and not leave entities trading in cryptocurrencies at the mercy of regulatory agencies alone. ‘investigation.

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