The Department of Revenue (“DoR”) in the Ministry of Finance issued a notification on 7th March 2023, bringing specific activities related to virtual digital assets (“VDA”) under the purview of the Prevention of Money Laundering Act, 2002 (“PMLA”).
For the purposes of this notification, the term ‘VDA’ has the same meaning as given to it under the Income Tax Act, 1961 (“Income Tax Act”) i.e. “any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise, by whatever name called, providing a digital representation of value exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account including its use in any financial transaction or investment, but not limited to investment scheme; and can be transferred, stored or traded electronically.” This definition includes within its ambit a non-fungible token and any other digital assets as may be notified by the Central Government.
As per the DoR notification, the following activities will be subject to the provisions of the PMLA, when such activities are carried out in the course of business, for or on behalf of another person, including a legal person:
- Exchange between 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; and
- Participation in and provision of financial services related to an issuer’s offer and sale of a VDA.
With the VDAs being brought under the purview of the PMLA, any person engaged in trade of VDAs and related financial activities as listed in DoR’s notification, will fall within the definition of “person carrying on designated business or profession” and in turn would be considered a “reporting entity” (“RE”). The obligations of an RE under the PMLA include, inter alia, verification of identity of its clients and beneficial owner, maintenance of records, and furnishing information related to such transactions to the Director, Financial Intelligence Unit-India.
The Indian Government has gradually been taking steps towards regulation of VDAs in the country. In 2022, the Government had introduced a tax on gains and income derived from VDAs. Bringing VDA related activities within the purview of the PMLA is yet another significant step taken by the Government towards regulating the VDA sector in India.
Having said the above, the wording used in the DoR notification is too broad and comes with its own set of potential challenges. The immediate implementation of the notification may potentially bring operational challenges for exchanges and other stakeholders of the VDA sector to ensure compliance with the notification. Although the inclusion of VDA related activities within the purview of PMLA is being seen as positive step by stakeholders and crypto enthusiasts, it would be essential to get clarity on the specific compliances required.