Finance Ministry brings crypto assets under Prevention of Money Laundering Act: What are the implications?

Finance Ministry brings crypto assets under Prevention of Money Laundering Act: What are the implications?

Why in News?

The Government has recently imposed money laundering provisions on cryptocurrencies.

Significance

• In line with the global trend: The move is in line with the 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.
• Filling the policy vacuum: Digital currency and assets like NFTs (non-fungible tokens) have gained traction globally over the last couple of years.
  • Trading in these assets has increased manifold with cryptocurrency exchanges being launched.
  • However, India, till last year, did not have a clear policy on either regulating or taxing such asset classes.

What is Cryptocurrency?

• It is a digital currency that can be used in place of conventional money.
  • In cryptocurrencies, cryptography is used to secure and verify transactions. It is also used to control the supply of cryptocurrencies.
  • It is supported by a decentralized peer-to-peer network called the blockchain.
  • The first cryptocurrency: Bitcoin, was launched in 2009 by Satoshi Nakamoto.

Features of Cryptocurrency

• Cheaper to transfer: Some coins are used to transfer value (measured in a currency like dollars) cheaper and faster than using credit or conventional means.
  • Meaning the cost to send someone crypto, which can be converted into regular currency, is cheaper than something like a check or wire transfer.
• No physical form: Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • However, it can be and many Governments are working to create a crypto coin version of its respective fiat currency.
• Decentralised: Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency.
  • When created with decentralized control, each cryptocurrency works through what is called distributed ledger technology, which is typically a blockchain, that serves as a public financial transaction database.

Challenges

While the supposed potential benefits from crypto assets have yet to materialize, significant risks have emerged.

• Undermining the monetary policy & international monetary system: The widespread adoption of crypto assets could undermine the effectiveness of monetary policy, circumvent capital flow management measures, and exacerbate fiscal risks.
• Security Risks: Cyberattacks on wallets, and exchange mechanisms (Cryptojacking).
  • They are prone to issues like Hijacking, Routing Attacks, and Distributed Denial of Service (DDoS) attacks.
• Shield to Crime: Used for illicit trading, criminal activities and organised crimes.
• Lack of Liquidity and Lower Acceptability: Outside the traditional banking systems.
• Price Volatility: Prone to price fluctuations and waste of computing power.
• Threat to the Indian rupee: If a large number of investors invest in digital coins rather than rupee-based savings like provident funds, the demand for the latter will fall.
• Consumer protection and enforcement: Due to the decentralised nature of digital instruments of bitcoins, any regulatory regime over crypto assets is challenging.

Indian Government’s Stand on Cryptocurrency

• The Reserve Bank of India (RBI), has long recommended a complete ban on all crypto, warning that it has the potential to destabilize the country’s monetary and fiscal stability.
• Despite having no regulatory framework for crypto, the Indian government introduced a new tax regime last year, taxing crypto income at 30% and a 1% tax deducted at source (TDS) on crypto transactions.