Science & Tech

Regulation of Virtual Digital Assets: India’s Progressive Approach

Regulating new technologies can be a difficult undertaking because their fast and constant change can have unanticipated repercussions. History is replete with examples of invention being stifled, such as the infamous Red Flag Act of the United Kingdom, which ended up boosting Europe’s automobile industry. Today, India’s recent notification on anti-money laundering regulations for businesses and service providers dealing in virtual digital assets is a step in the right direction.

What is mean by Virtual Digital Assets?

  • Virtual Digital Assets (VDAs) are digital representations of value that may be transmitted, stored, and traded electronically. Cryptocurrencies, tokens, and other types of digital assets secured using encryption and blockchain technology are examples of such assets.
  • Intangible: Although virtual digital assets exist exclusively in the digital environment, they can be utilised as a medium of exchange, a store of value, or an investment.
  • Virtual digital assets are often decentralised and operate independently of central authority, making them appealing to a wide range of consumers. However, their decentralised nature renders them vulnerable to illegal activities such as money laundering and terrorism financing, necessitating rules and control.

What is the relationship between virtual digital assets and money laundering?

  • Anonymity: Virtual digital assets provide some anonymity, which criminals can use to disguise their identities and actions.
  • Lack of comprehensive rules: The virtual digital asset space’s lack of comprehensive laws makes it easier for criminals to launder money using these assets.
  • Cross-border transactions: Virtual digital assets can be utilised to easily conduct cross-border transactions, allowing criminals to shift money across borders while avoiding discovery.
  • Decentralised nature: Because virtual digital assets are decentralised, there is no central authority controlling transactions, making it impossible to identify and monitor unlawful activities.
  • High liquidity: Because virtual digital assets are highly liquid and easily convertible into various kinds of cash, thieves can shift money around and launder their proceeds more easily.
  • Complex transactions: Some virtual digital asset transactions can be quite complex, making tracing the source of funds and detecting money laundering operations difficult.

India’s approach to virtual digital assets regulation

  • The 2002 Prevention of Money Laundering Act (PMLA): The PMLA was passed in 2002 in order to prevent and combat money laundering and related crimes. The act allows for the confiscation of property derived from or involved in money laundering, as well as the punishment of persons and corporations participating in money laundering activities.
  • Anti-money laundering provisions are being expanded: In a gazette announcement, India’s Union Finance Ministry extended anti-money laundering measures under the Prevention of Money Laundering Act (PMLA) Act of 2002 to virtual digital asset firms and service providers.
  • Mandatory registration: Virtual digital assets platforms that perform activities such as exchanging virtual digital assets for fiat currencies, exchanging one or more types of virtual digital assets, transferring virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets, and participating in and providing financial services related to an issuer’s offer and sale of virtual digital assets.
  • Implementation of customer knowledge and record-keeping measures: Reporting entity platforms, like as CoinSwitch, are now required to implement know your customer policies, record and monitor all transactions, and report any suspicious behaviour to the Financial Intelligence Unit-India.
  • Standardisation of norms: By extending anti-money laundering rules to virtual digital assets, a framework for virtual digital assets platforms to diligently monitor and respond to malpractices has been developed, making the Indian virtual digital assets market more transparent.
  • Compliance with global principles: India’s anti-money laundering measures are consistent with worldwide guidelines proposed by the International Monetary Fund and the Financial Action Task Force.
  • Tax rates should be reconsidered: With the PMLA notification reducing money laundering and terror financing threats, India has an opportunity to reassess its tax treatment of virtual digital assets, which is now an outlier both domestically and internationally.

How India can leverage G20 presidency?

  • Spearheading critical discussions on establishing a global regulatory framework for virtual digital assets.
  • Sharing its experience and leadership on this problem with other G20 countries.
  • Considering other G20 nations’ actions, such as Japan and South Korea’s construction of a framework to licence Virtual Asset Service Providers (VASPs) and Europe’s adoption of the Markets in Crypto-Assets (MiCA) regulation by the European Parliament.
  • Using the G20 platform to coordinate and give better control on the domestic virtual digital asset ecosystem might provide much-needed assurance to both everyday users and regulators.

@the end

India’s methodical approach to regulating virtual digital assets is a positive step. The G-20 presidency of India provides an opportunity to create a global regulatory framework for virtual digital assets. A progressive regulatory framework will cement India’s leadership in virtual digital assets and instill the animal spirit in India’s innovation economy.

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