Security Issues

Virtual Digital Assets (VDA) and Terror Financing

The Union Ministry of Home Affairs’ No Money for Terror conference concluded with a commitment from the 93 participating nations to end all financing of terror, including through the use of emerging digital technologies such as VDAs.

Problems regarding virtual digital assets

  • Concerns about the misuse of VDAs for illicit purposes necessitate careful legislative responses and forward-thinking regulatory safeguards.
  • On a fundamental level, these concerns stem from a lack of reporting and transparency norms, as well as a lack of international consensus on regulatory design.
  • Lack of reliable data: The Deputy Director of the Reserve Bank of India (RBI) highlighted the difficulty in regulating VDAs due to a lack of reliable data on VDA transactions.
  • Unregulated transactions: This allows bad actors to engage in unchecked transactions and defraud investors, as demonstrated by FTX, one of the (formerly) largest VDA exchanges.

India’s role in regulating the VDA

  • Capitalizing on the G20 Presidency: As one of the highest-ranked countries in terms of VDA adoption, India now has a critical role to play in shaping the global regulatory environment.
  • Empowering anti-money laundering authorities: In the short term, a viable approach for India is to instil confidence in the industry and investors by giving anti-money laundering (AML) authorities visibility over VDA transactions, as well as the authority to impose controls and prosecute in the event of any misuse.
  • India should follow FATF guidelines: There are several international templates available for this purpose. The Financial Action Task Force Guidelines on Virtual Asset Transactions (FATF Guidelines), which have been adopted by a number of jurisdictions, including the EU, Japan, and Singapore, are an example.

FATFs Guideline regarding VDA regulation

  • Minimum anti-money laundering standards: The FATF prescribes minimum anti-money laundering standards that countries should follow in order to reduce the likelihood of misuse, and the FATF Guidelines do the same for VDA transactions.
  • VDA licencing and reporting: The Guidelines apply to VDA service providers in member countries such as India. The FATF Guidelines include licensing/registration requirements as well as extensive reporting and record-keeping requirements for VDA service providers.
  • Obligations under the Travel Rule: The Travel Rule requires service providers to record the originator and beneficiary’s account details, transaction amount, and transaction purpose for all wire transfers.
  • Verifying identity above a certain threshold: All transactions exceeding $1,000 should be subject to customer due diligence obligations, which include verifying the customer and beneficiary’s identities.
  • Obligation on service providers: When a transaction is with a higher-risk country, the FATF Guidelines require VDA service providers to perform enhanced due diligence obligations (such as confirming the customer’s identity with a national database or potentially tracing the customer’s IP address to ensure there are no links to illicit activities).

India’s current laws to regulate VDA

  • The Prevention of Money Laundering Act, 2002 (PMLA) includes a reporting obligation: India’s existing anti-money laundering framework, the Prevention of Money Laundering Act, 2002 (PMLA), already applies these regulatory tools to traditional financial institutions. Notably, the PMLA includes reporting requirements for overseas transactions that are classified as “suspicious” under the framework.
  • VDAs are not covered by the PMLA: The PMLA currently does not apply to the VDA industry.
  • The government has the authority to notify any “designated business or profession” as a reporting entity under the PMLA and can issue a notification classifying VDA service providers as a designated business.

@the end

With the Digital Data Protection Bill and the Digital India Act already in the works, Indians and digital businesses will soon be able to operate within a consistent set of rights and responsibilities. The time has come to broaden regulatory oversight of the VDA industry in order to ensure that technological innovation occurs in a responsible and accountable manner.

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