Digital Assets and Money laundering

IN NEWS:

• The Ministry of Finance recently issued a notification to bring transactions relating to Virtual Digital Assets under the Prevention of Money Laundering Act (PMLA).

VIRTUAL DIGITAL ASSETS:

• A virtual asset is a digital representation of an item that has value in a specific environment. This medium of exchange or property can be digitally traded, transferred or used for payment or investment purposes.
• The most common example of a virtual asset is virtual currency such as Bitcoin and Ethereum. Gaming tokens, non-fungible tokens (NFTs) and governance tokens might also be considered virtual assets.
• The term virtual digital asset is defined under the Finance Act, 2022 to include the following:
  • Any information or code or number or token (not being Indian currency or foreign currency) which meets certain conditions
  • Non-fungible token (NFT) or any other token of similar nature, by whatever name called
  • Any other digital asset, as the government may specify by notification

HOW VDA AIDS MONEY LAUNDERING:

• Anonymity:
  • Unlike fiat currencies, there is a lack of clear paper trail in VDA transactions. Hence, tax evaders could use VDA assets like cryptocurrencies as their tax havens.
• Faster mode:
  • Unlike conventional laundering means like Hawala, VDA transactions instant. This speed makes them attractive to money launderers.
• Opacity:
  • Owing to the complex nature of their transactions, virtual assets offer far greater opacity than traditional fiat currencies.
• Absence of regulators
  • Fiat currencies are regulated by central banks like the RBI. However, there are no such central authority regulating the VDA ecosystem, making it difficult to track and monitor illicit activities.
• Cross border transaction:
  • With the help of dark web, VDAs are increasingly being used to move money across jurisdictions and pay for illicit activities, while avoid detection.
• Rising liquidity:
  • VDAs like Cryptocurrencies and NFT have become increasingly popular in recent times. The associated increase in frequency and volume of trading has helped enhance the liquidity of VDAs, making it easy for people to move money around and launder their proceeds.

PREVENTION OF MONEY LAUNDERING ACT, 2002:

• PMLA forms the core of the legal framework put in place by India to combat money laundering. It came into force in 2005.
• It has three main objectives:
  • To prevent and control money laundering;
  • To provide for confiscation and seizure of property obtained from laundered money
  • To deal with any other issue connected with money-laundering in India
• The Act was amended in 2012 and 2019.

REGARDING RECENT NOTIFICATION:

• The Enforcement Directorate and Income Tax Department have either probed or are probing several cases against companies running cryptocurrency exchanges and transactions. The notification is expected to aid investigative agencies in carrying out action against crypto firms.
• The notification laid out the nature of transactions to be covered under PMLA:
  • Exchange between virtual digital assets and fiat currencies
  • Exchange between one or more forms of virtual digital assets
  • Transfer of virtual digital assets
  • Safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets
  • Participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset

OTHER EFFORTS TOWARDS REGULATING VDAs:

• Taxation:
  • 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.
• The Cryptocurrency and Regulation of Official Digital Currency Bill, 2021:
  • The purport of the cryptocurrency bill is “to create a facilitative framework for the creation of the official digital currency to be issued by the RBI.
  • The bill also seeks to prohibit all private cryptocurrencies in India.
  • However, it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.
• Efforts by RBI:
  • In 2018, RBI issued a circular prohibiting banks and entities regulated by it from providing services in relation to virtual currencies (VCs). However, this ban was set aside by the Supreme Court in 2020.
  • In July 2022, RBI recommended a ban on cryptocurrencies citing ‘destabilising effects’ for the country’s monetary and fiscal health.

WAY FORWARD:

• Digital assets are by definition borderless and require international collaboration to prevent regulatory arbitrage. Therefore, any effort to regulate it can be effective only with significant international collaboration.

PRACTICE QUESTION:

Q. Explain the linkage between Virtual Digital Assets and money laundering. What measures have India taken to regulate virtual assets?