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Crypto Under PMLA 

crypto under pmla
Crypto Under PMLA

In News: Crypto Under PMLA

The Indian government has recently issued a notification bringing transactions involving crypto assets under the Prevention of Money Laundering Act.


Is Cryptocurrency Similar To Blockchain?

  • Although these terms are used together quite frequently, they are not similar. Blockchain is the technology that enables the existence of cryptocurrency.
  • A blockchain is a digital ledger of transactions that is distributed across the entire network of computer systems. It is like a ledger that shows the entire history of that piece of currency.
cryptocurrencies
  • To put it simply, it is a system of recording information that makes it impossible to hack the system.
  • Each block in the blockchain contains several transactions, and every time a new transaction occurs on it, a record of that transaction is added to every participant’s ledger.
  • A blockchain database can store a large quantity of information that can be utilised and accessed by many users at the same time. But what makes Blockchain unique is that it is not owned by a single person or entity—making it more secure and trustworthy.
  • The idea is that because no one controls the blockchain, they cannot take over and rewrite the records.
  • Today, blockchains have applications in diverse fields like video and audio streaming, supply chain management, social media, real estate documentation, etc.

Cryptocurrency Trading

  • Bitcoin is the topmost traded cryptocurrency, but it’s not the only kind of cryptocurrency. Currently, there are more than 22,000 cryptocurrencies like Ethereum, Polkadot, Solana, Dogecoin etc.
  • Just like the stock market, the crypto market has exchanges or brokers which act as facilitators. These exchanges often charge a fee or commission for each transaction.
  • Crypto exchanges rely on investors for the possession of cryptocurrency. This happens when users deposit crypto to sell and some new users come to the exchange to buy it—thereby, facilitating trading.

Advantages Of Cryptocurrencies

  • The primary advantage of cryptocurrencies is the mathematically designed blockchain network with finite supply. The main problem with the current monetary set-up is that when the government starts printing more money, the value of money gets wiped out due to high inflation.
  • Traditionally, gold has been one of the options for investors to hedge against inflation, but the supply of gold is not mathematically designed. Cryptocurrencies like Bitcoin give a better hedge against inflation compared to gold by ensuring a limited supply. Thus, it can act as a store of value.
  • Further, there are systems and processes that can be developed around the blockchain network, such as decentralised finance systems, which can provide greater efficiency compared to the traditional finance systems.
  • For example, international payments through cryptocurrencies are easy and cheap as they are not tied to any country or banking institution. Moreover, cryptographic techniques provide enhanced security.
  • Blockchain technology itself has great potential to reform financial record keeping and keeping track of asset transactions.
  • Furthermore, entry barriers for new players to create new protocols and applications are significantly lower than traditional financial institutions like banks.

Concerns Associated With Cryptocurrencies

  • Transaction records of cryptocurrencies are publicly available in an open ledger (blockchain) for record keeping in an anonymous (unnamed) and an encrypted form.
  • Though each transaction is recorded in a public log, names of buyers and sellers are never revealed and only their wallet IDs are revealed.
  • This keeps cryptocurrency users’ transactions private, but it also lets them buy or sell anything without easily tracing it back to them. That’s why it has become the preferred currency for buying drugs online or other illicit activities like terror financing.
  • Further, the anonymous nature of cryptocurrencies goes against the global money laundering rules.
  • Moreover, investments in cryptocurrencies are highly volatile, which leads to significant investment risks.
  • Central banks are concerned that if acceptance of cryptocurrencies as a medium of exchange grows, it can potentially undermine their control on monetary policies.

Transactions To Be Covered Under PMLA

  • Exchange between virtual digital assets (VDAs) and fiat currencies;
  • Exchange between one or more forms of VDAs;
  • Transfer of VDAs;
  • Safekeeping or administration of VDAs or instruments enabling control over VDAs; Participation in and provision of financial services related to an issuer’s offer and sale of a VDA.

Reasons For The Current Move (Crypto Under PMLA)

  • A July 2021 report had estimated India as being the country with the highest number of crypto owners, at 10.07 crore, which was more than threefold the number of owners of crypto assets in the second-ranked U.S.
  • Disclosures by the government indicate that the volume of trade in unregulated virtual assets has grown sizeably in recent years.
  • Last month, Ministry of Finance informed the Lok Sabha that the Enforcement Directorate was investigating several cases related to cryptocurrency frauds wherein a few crypto exchanges had been found involved in money laundering.
  • As much as ₹936 crore had been attached or frozen as on January 31, deemed to be proceeds of crime.
  • Bringing VDAs under PMLA now lays the responsibility of highlighting the origin of all activity, including safekeeping, in such assets upon individuals and businesses participating in or facilitating these transactions.

  • In the Union Budget last year, even though the government brought in a tax for cryptocurrencies, it did not proceed with framing regulations.
  • Earlier, the Reserve Bank of India had proposed a ban that was set aside by a court order. In July last year, flagging the RBI’s concerns, the finance minister told the Parliament that international collaboration would be needed for any effective regulation or ban on cryptocurrency.
  • From April 2022, India introduced a 30 per cent income tax on gains made from cryptocurrencies.
  • In July 2022, rules regarding 1 per cent tax deducted at source on cryptocurrency came into effect.

  • In the Union Budget last year, even though the government brought in a tax for cryptocurrencies, it did not proceed with framing regulations.
  • Earlier, the Reserve Bank of India had proposed a ban that was set aside by a court order. In July last year, flagging the RBI’s concerns, the finance minister told the Parliament that international collaboration would be needed for any effective regulation or ban on cryptocurrency.
  • From April 2022, India introduced a 30 per cent income tax on gains made from cryptocurrencies.
  • In July 2022, rules regarding 1 per cent tax deducted at source on cryptocurrency came into effect.

IMF Guidelines On Crypto

Recently, the International Monetary Fund has also laid out a nine-point action plan for countries to treat crypto assets: The nine elements—or policy actions—are:

  • Safeguard monetary sovereignty and stability by strengthening monetary policy frameworks and do not grant crypto assets official currency or legal tender status.
  • Guard against excessive capital flow volatility and maintain effectiveness of capital flow management measures.
  • Analyze and disclose fiscal risks and adopt unambiguous tax treatment of crypto assets.
  • Establish legal certainty of crypto assets and address legal risks.
  • Develop and enforce prudential, conduct, and oversight requirements to all crypto market actors.
  • Establish a joint monitoring framework across different domestic agencies and authorities.
  • Establish international collaborative arrangements to enhance supervision and enforcement of crypto asset regulations.
  • Monitor the impact of crypto assets on the stability of the international monetary system.
  • Strengthen global cooperation to develop digital infrastructures and alternative solutions for cross-border payments and finance.

By adopting the framework, policy makers can better mitigate the risks posed by crypto assets while also harnessing the potential benefits of the technological innovation associated with it.


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