Introduction:
The Financial Intelligence Unit (FIU) of India, operating under the Ministry of Finance, has initiated significant regulatory actions by issuing show-cause notices to nine offshore cryptocurrency platforms, invoking the provisions of the Prevention of Money Laundering Act (PMLA)[1].In a significant move aimed at curbing illegal activities in the cryptocurrency space, the Financial Intelligence Unit (FIU) has taken stringent action against several major offshore Virtual Digital Assets Service Providers (VDA SPs) operating in India. The affected exchanges, including prominent names such as Binance, Kucoin, Huobi, Kraken, Gate.io, Bittrex, Bitstamp, MEXC Global, and Bitfinex, have been accused of operating illegally without adhering to the provisions outlined in the country’s Prevention of Money Laundering Act (PMLA).
About the Notice:
The FIU, in a formal statement, revealed that it had issued compliance Show Cause Notices to these entities under PMLA, highlighting the gravity of their alleged violations. The move underscores the Indian government’s commitment to maintaining the integrity of its financial system and ensuring that entities engaging in digital asset services comply with the regulatory framework in place. Additionally, the Ministry of Electronics and Information Technology has been directed to block the URLs associated with these nine entities, further emphasizing the authorities’ determination to curb any illicit activities related to virtual currencies. This development marks a pivotal moment in India’s approach to regulating the rapidly evolving cryptocurrency landscape and sends a clear message about the imperative for compliance with established legal and financial protocols in the country.
Background:
In a pivotal development for the Indian cryptocurrency landscape, the Income Tax department’s imposition of a 30% capital gains tax and a 1% TDS on crypto and virtual digital asset (VDA) transactions last year led to a significant migration of liquidity from domestic centralized crypto exchanges to offshore counterparts. This shift not only raised concerns about the global competitiveness of Indian exchanges, particularly in comparison to major players like Binance, but also underscored the need for a more level playing field. Recognizing this disparity, the Financial Intelligence Unit has now issued a show cause notice to nine offshore centralized crypto exchanges, urging them to adhere to the same KYC (Know Your Customer) and AML (Anti-Money Laundering) guidelines applicable to their Indian counterparts.
Furthermore, these offshore exchanges are expected to seek registration with the FIU-IND, mirroring the compliance efforts undertaken by 31 Indian operators. This move was a significant victory for Indian exchanges, as it aligns the regulatory expectations for both domestic and offshore players, fostering a more equitable environment. Notably, decentralized exchanges (DEXs) remain outside the purview of this notice, preserving their distinct regulatory status.
Way Forward:
In the evolving landscape of virtual digital asset services in India, the regulatory framework has accentuated the need for stringent oversight. Virtual Digital Asset Service Providers (VDA SPs), both offshore and onshore, engaged in activities such as the exchange between virtual digital assets and fiat currencies, transfer of virtual digital assets, and safekeeping or administration of these assets are now mandated to register with the Financial Intelligence Unit India (FIU IND) as Reporting Entities. This regulatory requirement is not contingent on physical presence within India but is rooted in the nature of the activities undertaken. The impact on peer-to-peer transactions facilitated by platforms such as Binance in India is yet to unfold, with industry stakeholders keenly observing the extent of information disclosure to Indian authorities. In essence, these regulatory developments signal a crucial step towards harmonizing the compliance landscape and ensuring a fairer competition in the Indian crypto market.
Significance of the Notice:
Under the Prevention of Money Laundering Act (PMLA) 2002, VDA SPs are bound by a set of obligations, including reporting, record-keeping, and compliance with anti-money laundering (AML) and counter-financing of terrorism (CFT) measures. Despite catering to a significant portion of the Indian user base, numerous offshore entities had hitherto remained unregistered, eluding the purview of the AML and CFT framework. The recent emphasis on registration and compliance underscores a concerted effort to bring these entities within the regulatory ambit, enhancing the integrity and security of virtual asset transactions in the Indian market. To date, 31 VDA SPs have embraced this regulatory commitment by registering with the FIU IND, signalling a broader move towards a more robust and comprehensive regulatory ecosystem.
Conclusion:
The invocation of the PMLA underscores the gravity of the regulatory framework, emphasizing the need for robust measures to curb illicit financial activities in the cryptocurrency space. This move represents a targeted effort to enforce compliance with anti-money laundering legislation among prominent virtual digital asset platforms, including industry giants like Binance and Kucoin. The show-cause notices signal a stringent stance by the Indian regulatory authorities against non-compliance with financial regulations, particularly in the context of preventing money laundering. The unfolding developments are indicative of the government’s commitment to fostering a secure and transparent environment for cryptocurrency transactions, aligning with global efforts to regulate and safeguard the burgeoning digital asset market. As the industry navigates these regulatory waters, stakeholders are closely observing the responses from the offshore platforms and anticipating broader implications for the cryptocurrency landscape in India.
Author: Vatsal Gaur
Footnotes