Central Idea

• The regulation of new technologies can be a challenging task, as their rapid and constant change can create unintended consequences. History is full of examples where innovations were curtailed, such as the infamous Red Flag Act of the UK that ended up strengthening the motorcar industry in Europe. Today, India’s recent notification on anti-money laundering provisions for virtual digital assets businesses and service providers is a step in the right direction.

What is mean by Virtual Digital Assets?

• Digital representations of value: Virtual Digital Assets refer to digital representations of value that can be transferred, stored, or traded electronically. These assets may include cryptocurrencies, tokens, or other forms of digital assets that are secured using cryptography and blockchain technology.
• Intangible: Virtual digital assets are intangible and exist only in the digital realm, but they can be used as a medium of exchange, store of value, or investment.
• Decentralized nature: Virtual digital assets are typically decentralized and operate independently of central authorities, making them appealing to many users. However, their decentralized nature also makes them susceptible to illicit activities such as money laundering and terrorism financing, which has led to the need for regulations and oversight.

How Virtual digital assets are linked with money laundering?

• Anonymity: Virtual digital assets offer a degree of anonymity, which can be exploited by criminals to conceal their identities and activities.
• Lack of regulations: The lack of comprehensive regulations in the virtual digital asset space makes it easier for criminals to launder money using these assets.
• Cross-border transactions: Virtual digital assets can be used to conduct cross-border transactions with ease, making it easier for criminals to move money across jurisdictions and avoid detection.
• Decentralized nature: The decentralized nature of virtual digital assets means that there is no central authority regulating the transactions, making it difficult to track and monitor illicit activities.
• High liquidity: Virtual digital assets are highly liquid and can be easily converted into other forms of currency, making it easier for criminals to move money around and launder their proceeds.
• Complex transactions: Some virtual digital asset transactions can be highly complex, making it difficult to trace the source of the funds and detect money laundering activities.

India’s approach to regulate virtual digital assets

• Prevention of Money Laundering Act (PMLA) Act of 2002: PMLA enacted in 2002 to prevent and combat money laundering and related crimes. The act provides for the confiscation of property derived from, or involved in, money laundering, and also imposes penalties on individuals and entities involved in money laundering activities.
• Extension of anti-money laundering provisions: India’s Union Finance Ministry, in a gazette notification, extended anti-money laundering provisions to virtual digital assets businesses and service providers, under the Prevention of Money Laundering Act (PMLA) Act of 2002.
• Mandatory registration: Virtual digital assets platforms carrying out activities such as 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, and participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset, must register as a reporting entity with the Financial Intelligence Unit-India.
• Implementation of know your customer and record-keeping measures: Reporting entity platforms such as CoinSwitch are now mandated to implement know your customer, record and monitor all transactions, and report to the Financial Intelligence Unit-India as and when any suspicious activity is detected.
• Standardisation of norms: By extending anti-money laundering provisions to virtual digital assets, a framework has been created for virtual digital assets platforms to diligently monitor and take actions against malpractices, making the Indian virtual digital assets sector more transparent.
• Compliance with global guidelines: The anti-money laundering provisions in India are in line with global guidelines put forward by the International Monetary Fund and the Financial Action Task Force.
• Reconsideration of tax rates: With the mitigation of money laundering and terror financing risks through the PMLA notification, there is an opportunity for India to reconsider its tax treatment of virtual digital assets, which is currently 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 leadership and experience on this issue with other G20 nations.
• Considering the steps taken by other G20 nations, such as Japan and South Korea’s establishment of a framework to license Virtual Asset Service Providers (VASPs), and Europe’s passing of the Markets in Crypto-Assets (MiCA) regulation by the European Parliament.
• Using the G20 platform to coordinate and provide greater oversight on the domestic virtual digital assets ecosystem, which could provide much-needed assurance to everyday users as well as regulators.

Conclusion

• India’s measured approach to regulating virtual digital assets is a step in the right direction. With India’s presidency of the G-20, it is an opportunity to establish a global regulatory framework for virtual digital assets. A progressive regulatory framework will establish India’s virtual digital assets leadership and instill the animal spirit in India’s innovation economy.

Mains Question

Q. What do you understand by mean by Virtual Digital Assets? Establish a link between virtual digital assets and money laundering. Discuss how India is taking measures to regulate virtual assets?

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