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.
- 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.
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.
|Prevention of Money Laundering Act (PMLA) 2002
o It was enacted in January 2003 and the Act along with the Rules framed thereunder has come into force with effect from 1st July 2005.
o The Parliament enacted the PMLA as a result of international commitment to sternly deal with the menace of money laundering of proceeds of a crime having transnational consequences on the financial systems of the countries.
o The PML Act seeks to combat money laundering in India and has three main objectives:
▪ To prevent and control money laundering
▪ To confiscate and seize the property obtained from the laundered money; and
▪ To deal with any other issue connected with money laundering in India.
● Definition of money laundering:
o Sec. 3 of PMLA defines the offence of money laundering as whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of the offence of money-laundering.