Why did FIU IND Act Against Virtual Asset Providers?

What’s in Today’s Article?

• Background
• What is the Premise of the Noncompliance?
• Why VDA SPs have been made to Comply with PMLA 2002?
• How are other Countries Regulating Virtual Assets?
• What Considerations emerge when looking to Regulate VDAs?

Background

• On December 28^th, the Financial Intelligence Unit India (FIU IND) issued show cause notices to nine offshore Virtual Digital Asset Service Providers (VDA SPs).
• These VDA SPs include Binance, Kucoin, Huobi, Bitfinex and MEXC Global, among others.
• The Director FIU IND wrote to the Secretary, Ministry of Electronics and Information Technology to block the URLs of the above-mentioned entities.

What is the Premise of the Noncompliance?

• In March 2023, VDA SPs in India were brought under anti­-money laundering/counter financing of terrorism regulations.
• They were mandated to comply with Prevention of Money Laundering Act (PMLA) 2002, verify the identities of onboarded clients, and maintain records of their financial positions and potentially suspicious transactions.
• This obligation applies to all VDA SPs operating in India irrespective of physical presence.
• Non­registration made entities non­compliant despite serving Indian users.
• To put it in perspective, the entities “though catering to a substantial part of Indian users were not getting registered and coming under the Anti Money Laundering (AML) and Counter Financing of Terrorism Network (CFT) framework”.
• Currently, 31 VDA SPs have registered with FIU IND.
• However, several offshore entities though catering to a substantial part of Indian users were not getting registered and coming under the Anti Money Laundering (AML) and Counter Financing of Terrorism (CFT) framework.

Why VDA SPs have been made to Comply with PMLA 2002?

• The objective of the PMLA and its reporting obligation are to enable monitoring and tracking of financial transactions to curb money laundering and terror financing.
• Complying with the PMLA 2002 addresses one of the primary concerns of any regulator about the purported anonymity of the crypto assets and their potential use for unlawful purpose.
• This is also in line with India’s efforts through the G­20 where it has been advocating for global regulation of cryptocurrency.
• The regulation casts reporting, record keeping, and other obligations on the VDA SPs under the PML Act which also includes registration with the FIU IND.
• Mandatory KYC verifications would ensure lack of anonymity and businesses not encountering multiple hurdles.

How are other Countries Regulating Virtual Assets? 

• In Dubai (UAE), they follow licensing framework. The mandatory licenses are comprehensively categorised based on the service that the entity wants to offer in the market.
  • For obtaining the mandatory license in the Emirate, it imposes an obligation to comply with AML-CFT laws relevant to “its VA activities, businesses or operations in any jurisdiction at all times”.
• In the European Union, the Markets in Crypto-Assets Regulation (MiCA) endeavours to institute uniform EU market rules for crypto-assets.
  • The regulation is premised around “transparency, disclosure, authorisation and supervision of transactions”.
  • It would provide measures to tackle market manipulation, prevent money laundering, terrorist financing and other criminal activities.
  • Service providers under this common law would require authorisation to operate in the region.
  • Though entered into force in June 2023, the legislation is still in consultation stages. The final report is expected in June 2024.
• Across the Atlantic, the U.S. does not have a thorough nationwide regulatory framework at present.
  • Some digital assets and related activities are covered under certain existing regulations, such as the Bank Secrecy Act and the Anti-Money Laundering Act of 2020.

What Considerations emerge when looking to Regulate VDAs?

• The Bureau for International Settlements (BIS), in a report about financial stability from crypto assets in emerging economies (August 2023) observed three high-level policy options under consideration.
  • These include an outright ban, containment and regulation.
• BIS observed that an outright ban may not prove enforceable.
• This is because of the pseudo anonymous nature of crypto markets. There could be a possibility that regulators lose all sight of the market, further shrinking their transparency and making them less predictable.
• Containment would imply controlling the flows between crypto markets and traditional financial systems.
• However, BIS argued that the strategy would not address the vulnerabilities inherent in the crypto markets and could result in financial stability risks.
• About regulation, motivation to regulate the asset varies across jurisdictions.
• The report holds that it must be ensured that the benefits of regulating and supervising are greater than the costs involved.
• Furthermore, for emerging market economies three issues are of importance, that is:
  • Defining the (regulatory) authority or entity and their scope,
  • Scope of regulation in terms of either activity or entity,
  • Filling in the data gaps to understand the technology and interconnections.

Q1) What is the role of FInancial Intelligence Unit?

The Financial Intelligence Unit - India (FIU-IND) is the central agency in India responsible for receiving/collecting, analysing, and disseminating information relating to suspicious financial transactions.

Q2) What is the meaning of Cryptojacking?

Cryptojacking is the act of exploiting a computer to mine cryptocurrencies, often through websites, against the user's will or while the user is unaware.

Source: Why did FIU IND act against virtual asset providers?  | PIB