Prevention of Money Laundering Act Enforces Crypto Regulation in India

• India’s PMLA amendments aim to regulate crypto transactions involving fiat and intermediaries.
• Due to decentralized blockchain and anonymous transactions, India faces difficulty enforcing money laundering controls.
• The country still requires a comprehensive legislative framework for virtual digital currencies and a centralized market regulator.

Regulators in India and globally have identified difficulty enforcing money laundering controls as a critical risk in the crypto ecosystem. The decentralized nature of private crypto assets or currencies makes them challenging to regulate, and the fact that the crypto ecosystem is open to more than geographical boundaries exacerbates the problem.

Transactions on a blockchain are anonymous, making transaction tracing and implementing foreign exchange controls complicated.

The recent amendments to the Prevention of Money Laundering Act 2022 (PMLA) seek to use two regulatory touchpoints within the crypto ecosystem to enforce and implement the regulation. These touch points are when a crypto asset is converted to fiat currency and the functioning of intermediaries.

The set of transactions that have been brought under the scope of the PMLA includes the exchange between virtual digital assets and fiat currencies, the exchange between one or more forms of virtual digital assets, the transfer of virtual digital assets, safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets, and participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.

The exchange of virtual digital assets and fiat currencies, the exchange of one or more forms of virtual digital assets, the transfer of virtual digital assets, the safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets, and participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset are among the transactions brought under the scope of the PMLA.

The amendments to the PMLA will play a critical role in fraud control and strengthen the confidence of investors, retail consumers, and financial markets in the crypto economy. They align the Indian legal framework with global efforts to regulate trading in crypto assets, but they do not legitimize or legalize private cryptocurrencies. There is still a need for a comprehensive legislative framework for virtual digital currencies, which should ideally provide for a market regulator for the crypto ecosystem and a need to regulate intermediaries.

As these rules are implemented and enforced, it may signal to financial regulators that effective regulation of transactions in private crypto assets is possible, and a ban is not warranted. Bringing transactions in virtual digital assets within the scope of the PMLA also aligns with the need for a globally coordinated effort to effectively regulate the crypto ecosystem, which cuts across sovereign borders.