Central Idea

The Financial Intelligence Unit India (FIU IND) issued notices to offshore virtual digital asset service providers (VDA SPs) for non-compliance with the Prevention of Money Laundering Act, 2002 (PMLA).
A request was made to the Ministry of Electronics and Information Technology to block URLs of these entities.

About Virtual Digital Assets (VDAs)

Digital Value: Virtual Digital Assets are digital forms of value like cryptocurrencies and tokens. They are secured using cryptography and blockchain technology.
Intangible and Digital: These assets exist only in digital form and can be used for transactions, investments, or as a store of value.
Decentralized: They usually operate independently of central authorities, which makes them attractive but also prone to risks like money laundering. This has led to calls for regulation and oversight.

Regulatory Changes in 2023: VDA SPs were brought under anti-money laundering and counter-terrorism financing regulations in March 2023.
Mandatory Compliance: These regulations required VDA SPs to register, verify client identities, and maintain records of financial transactions.
Non-Registration Issue: Non-compliant entities continued to serve Indian users without registration, evading the AML and CFT framework.

Monitoring Financial Transactions: The PMLA aims to track financial transactions to prevent money laundering and terror financing.
Selective Compliance Advocacy: Legal experts suggest that FIU IND should enforce compliance only on entities fitting the March 2023 notification parameters.
KYC Benefits: Adherence to KYC mandates is seen as beneficial for VDA SPs, addressing concerns about anonymity and unlawful use of crypto assets.

India’s Global Advocacy: India’s enforcement aligns with its global efforts for cryptocurrency regulation, including proposed frameworks by the IMF and the Financial Stability Board.
G-20 Influence: India’s role in the G-20 has been pivotal in advocating for global cryptocurrency regulation.

Dubai’s VARA Model: Dubai’s Virtual Assets Regulatory Authority (VARA) provides a comprehensive licensing framework, emphasizing consumer protection and AML-CFT compliance.
EU’s MiCA Regulation: The Markets in Crypto-Assets Regulation (MiCA) in the EU focuses on transparency, disclosure, and supervision, requiring service providers to be authorized.
U.S. Regulatory Framework: The U.S. lacks a comprehensive nationwide framework but covers digital assets under existing regulations like the Bank Secrecy Act.

Policy Options by BIS: The Bureau for International Settlements (BIS) outlines three policy options: outright ban, containment, and regulation.
Challenges of an Outright Ban: An outright ban may be unenforceable due to the pseudo-anonymous nature of crypto markets.
Containment Strategy: Containment involves controlling flows between crypto and traditional financial systems but may not address inherent vulnerabilities.
Regulatory Motivations: The motivation to regulate varies, with the need to ensure regulatory benefits outweigh costs.
Focus Areas for Emerging Markets: Emerging market economies (EMEs) need to define regulatory authority, scope of regulation, and fill data gaps to understand technology interconnections.

Balancing Act: Regulating virtual digital assets presents a complex balancing act between innovation, consumer protection, and financial stability.
Global Coordination: The varied approaches across jurisdictions highlight the need for global coordination and harmonization in VDA regulations.
India’s Proactive Stance: India’s recent actions reflect a proactive stance in aligning with global standards while addressing local concerns.
Future Challenges: As the virtual asset landscape evolves, regulators worldwide will continue to face challenges in adapting their frameworks to ensure effective oversight without stifling innovation.