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FIU IND Act Against Virtual Asset Providers  |

FIU IND Act Against Virtual Asset Providers 

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∙ The Financial Intelligence Unit India (FIU IND) issued compliance show cause notices to nine offshore Virtual Digital Asset Service Providers (VDA SPs).

About compliance action

∙ As part of compliance action against the offshore entities,FIU IND issued show-cause notices to offshore virtual digital asset service providers (VDA SPs) for “operating illegally” without complying with the provisions of the Prevention of Money Laundering Act, 2002 (PMLA).

ο FIU IND has written to the Secretary of the Ministry of Electronics and Information Technology, urging the blocking of URLs associated with these offshore entities.

∙ This move aims to prevent their continued operation in India without adhering to the regulatory obligations outlined in the PMLA.

Legislation

∙ In March 2023, Virtual Digital Asset Service Providers (VDA SPs) in India were brought under anti-money laundering/counter financing of terrorism regulations.

∙ They were mandated to comply with PMLA 2002, verify the identities of onboarded clients, and maintain records of their financial positions and potentially suspicious transactions.

∙ This obligation applies to all VDA SPs operating in India irrespective of physical presence and engaged in activities like exchange between virtual digital assets and fiat currencies, transfer of virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets etc. are required to be registered with FIU IND as Reporting Entity

Purpose

∙ The objective of the PMLA and its reporting obligation are to enable monitoring and tracking of financial transactions to curb money laundering and terror financing.

∙ Recent move comes as part of the broader effort to bring Virtual Digital Assets Service Providers under the Anti Money Laundering/Counter Financing of Terrorism (AML-CFT) framework,

Present Status and Challenges

∙ Till date 31 VDA SPs have registered with FIU IND.

∙ However, several offshore entities, though catering to a substantial part of Indian users, were not getting registered and coming under the Anti Money Laundering (AML) and Counter Financing of Terrorism (CFT) framework.

Other steps to regulate VDAs

∙ The Bureau for International Settlements (BIS), which is the global forum for cooperation among central banks, in a report about financial stability from crypto assets in emerging economies (August 2023) observed three high-level policy options under consideration.

ο These include an outright ban, containment and regulation. BIS observed that an outright ban may not prove enforceable.

ο This is because of the pseudo-anonymous nature of crypto markets. There could be a possibility that regulators lose all sight of the market, further shrinking their transparency and making them less predictable.

ο Containment would imply controlling the flows between crypto markets and traditional financial systems.

∙ However, BIS argued that the strategy would not address the vulnerabilities inherent in the crypto markets and could result in financial stability risks.

Conclusion and Way Forward

∙ As the cryptocurrency landscape continues to evolve globally, regulatory interventions become imperative to protect investors and prevent illicit financial activities.

∙ The actions taken by the Indian government signal a proactive stance in addressing potential risks associated with the use of virtual digital assets.

∙ The cryptocurrency community will keenly observe the developments to gauge the impact on the industry’s regulatory landscape in India.

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