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9th March 2023 (8 Topics)

Money laundering laws will now cover cryptocurrency trade


In a gazette notification, the Finance Ministry has mentioned that the anti-money laundering legislation is going to be applied to crypto trading, safekeeping and related financial services.

About the development: 

  • The government has imposed money laundering provisions on cryptocurrencies or virtual assets as it looks to tighten oversight of digital assets.
  • After this, Indian crypto exchanges will have to report suspicious activity to the Financial Intelligence Unit India (FIU-IND).
  • Need of the initiative: There is a global trend of requiring digital-asset platforms to follow anti-money laundering standards similar to those followed by other regulated entities like banks or stock brokers.

Status of Crypto currencies:

  • A cryptocurrency is a medium of exchange, such as the rupee or the US dollar, but is digital in format that uses encryption techniques to both control the creation of monetary units and to verify the exchange of money.

Bitcoin is the largest and most well-known cryptocurrency in the world.

  • Strong cryptography is used to protect transaction records, regulate the production of new coins, and confirm ownership transfers. 
  • Generally, it is not issued by a central authority and doesn't exist in tangible form (like paper money).
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.
  • The majority of cryptocurrencies are seen as alternative currencies or methods of financial exchange. Currently, they fall beyond the purview of official monetary policy and are not regulated by national governments.
    • Recently, El Salvador became the first nation in the world to accept Bitcoin as legal money in September 2021.

Prevention of Money Laundering Act (PMLA), 2002:

  • Background:
    • The PMLA was enacted in response to India’s global commitment (Vienna Convention) to combat the menace of money laundering. 
  • About:
    • It is a criminal law enacted to prevent money laundering and to provide for confiscation of property derived from, or involved in, money-laundering and related matters.
    • It forms the core of the legal framework put in place by India to combat Money Laundering.
    • The provisions of this act are applicable to all financial institutions, banks (Including RBI), mutual funds, insurance companies, and their financial intermediaries.
  • Recent Amendments:
    • Clarification about the Position of Proceeds of Crime: Proceeds of the Crime not only include the property derived from scheduled offence but would also include any other property derived or obtained indulging into any criminal activity relate-able or similar to the scheduled offence.
    • Money Laundering Redefined: Money Laundering was not an independent crime rather depended on another crime, known as the predicate offence or scheduled offence.
      • The amendment seeks to treat money laundering as a stand-alone crime.
      • Under Section 3 of PMLA, the person shall be accused of money laundering if in any manner that person is directly or indirectly involved in the proceeds of the crime.
        • Concealment
        • Possession
        • Acquisition
        • Use or projecting as untainted property
        • Claiming as untainted property
    • Continuing Nature of Offence: This amendment further mentioned that the person will be considered to be involved in the offence of money laundering till the time that person is getting the fruits of activities related to money laundering as this offence is of a continuing nature.

Issues in policy framework:

  • High volatility: Cryptocurrency has a volatile nature and is speculative. High investment quantities cause market volatility, which causes price fluctuations and the potential for significant losses for investors.
  • Absence of Ombudsmen: Consumers are exposed to transactional and informational risks because there is currently no place where a user may ask for support or a way to resolve a grievance relating to crypto assets.
  • Absence of a regulatory framework: Lack of regulatory authority has raised the likelihood of fraud, endangering investor protection and the flow of money throughout the economy.

Way forward:

  • International collaborations: Crypto assets are by definition borderless and require international collaboration to prevent regulatory arbitrage.
  • Defining Cryptocurrency: Cryptocurrencies should be explicitly defined as securities or other financial instruments under the relevant national laws.

Central Bank Digital Currency (CBDC): The establishment of a Central Bank Digital Currency (CBDC) for India in the form of the Digital Rupee was announced by the Indian Finance Minister. It will significantly strengthen India's digital economy.

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