Explained | Why is crypto trade within PMLA ambit? Premium

How will the money trail in cryptocurrency transactions be tracked by intelligence units?

The story so far: On March 7, to further tighten the loosely regulated crypto market, the Finance Ministry said that all virtual digital assets (VDAs) will come within the ambit of the Prevention of Money Laundering Act, 2002 (PMLA).

The anti-money laundering legislation was passed by the National Democratic Alliance government in 2002, and came into force on July 1, 2005. The PMLA was showcased as India’s commitment to the Vienna Convention on combating money laundering, drug trafficking, and countering the financing of terror (CFT). The law was aimed at curbing the process of converting illegally earned money into legal cash. The Act empowered the Enforcement Directorate (ED) to control money laundering, confiscate property, and punish offenders.

Editorial | Belated, but essential: On bringing all trade in virtual digital assets under the PMLA

In July 2022, Union Minister of State for Finance Pankaj Chaudhary told the Lok Sabha, in response to a query on cases registered by the ED, that “till March 31, 2022, the ED recorded around 5,422 cases, attached proceeds to the tune of ₹1,04,702 crore (approx.), filed Prosecution Complaint in 992 cases resulting in confiscation of ₹869.31 crore and convicted 23 accused persons under PMLA.”

The gazette notification by the Ministry brings cryptocurrency transactions within the ambit of PMLA. This means that Indian crypto exchanges will have to report any suspicious activity related to buying or selling of cryptocurrency to the Financial Intelligence Unit – India (FIU-IND). This central agency is responsible for receiving, processing, analysing, and disseminating information related to suspicious financial transactions to law enforcement agencies and overseas FIUs. In its analysis, if the FIU-IND finds wrongdoing, it will alert the ED. Under Section 5 and 8(4) of the Act, the ED has discretionary powers to search and seize suspected property without any judicial permission.

For a little more than a decade, cryptocurrencies, non-fungible tokens (NFT) and other digital assets enjoyed a regulation-free environment. But, in the past couple of years, as the use of digital assets has gone mainstream, regulators have turned hawkish. The value of all existing cryptocurrency is about $804 billion as of January 3, 2023, according to cryptocurrency price-tracking site CoinMarketCap.com. That is about twice the GDP of Singapore in 2021. In India, according to a survey conducted by crypto exchange KuCoin, over 10 crore Indians have invested in cryptocurrencies.

Separately, according to a report by blockchain analytics firm Chainalysis, illegal use of cryptocurrencies hit a record $20.1 billion last year. Transactions associated with sanctioned entities jumped over 1,00,000-fold, making up 44% of last year’s illegal activity.