India shows the way to world by bringing cryptos under money laundering law

Cryptocurrencies led by Bitcoin have been perceived to be catering to the netherworld.  They have been described as currencies that caters to peers – people doing shady businesses or transactions entering into an unstated compact to feather their collective nests. They symbolise solidarity among thieves as it were. They confer anonymity as they exist only in a virtual world which has no soul to be damned.

Governments across the world are a harried lot in the wake of the rise of cryptocurrencies that respect no borders nor any regulators or governmental authority. Small wonder then that G-20, which India is presiding over this year, has hailed a new Indian initiative on this front. It could well form the template for other nations.

As G20 President, India has asked the IMF and the Financial Stability Board to come up with a joint technical paper on the macroeconomic and regulatory perspectives of cryptocurrency assets. This paper will help in the formulation of a coordinated and comprehensive policy approach to cryptocurrency assets.

The international organisations are expected to present their joint paper in October. India has done well to be a pioneer on this front.

Also read: India imposes money laundering provisions on cryptocurrencies

What the latest Indian government initiative spells can be succinctly summarized as follows:

One is that this move will give authorities greater power to monitor the transfer of virtual digital assets beyond the country’s borders, given the fact that the money trail is important in cracking down on shady deals disappearing into secret foreign bank accounts.

Under the anti-money laundering law, ‘reporting entities’ are required to maintain Know Your Customer (KYC) details of their clients and beneficial owners. The finance ministry notified on Tuesday, March 7 that entities dealing in virtual digital assets (VDA) will now be considered ‘reporting entities’ under Prevention of Money Laundering Act, 2002.

The definition of ‘virtual assets’ would be the same as that in the Income-Tax Act, the notification stated. The definition includes cryptocurrencies and non-fungible tokens.

As of January 31, the Enforcement Directorate (ED) has attached proceeds of crime worth ₹936 crore in connection with crypto frauds. Last month, at the G20 meeting of finance ministers and central bank governors in Bengaluru, International Monetary Fund’s (IMF’s) managing director Kristalina Georgieva endorsed India’s stance on private cryptocurrencies and other digital assets and said there was a need for a strong push on global regulation of such assets.

She went on to elaborate that we have to differentiate between central bank digital currencies that are backed by the state and stablecoins, and cryptocurrency assets that are privately issued. There has to be a very strong push for regulation and if regulation fails, if you’re slow to do it, then we should not take it off the table or ban those assets because they may create financial stability risk.

Also read: RBI nudges Finance Ministry to enact law banning cryptocurrencies

RBI governor Shaktikanta Das echoed similar sentiments by saying there was an acceptance among major global economies that cryptocurrency assets involve several major risks to financial stability, monetary systems, cybersecurity issues, and overall financial stability, and they need to be looked at. The effort is to develop an international framework, an international architecture to deal with this problem, he had said.

The ED would now be able to investigate Virtual Digital Asset (VDA) transactions. The Opposition parties and Prime Minister Narendra Modi’s detractors would predictably cry foul, as in their worldview the new-fangled law would be used to harass and browbeat critics. But, in this day and age, raids on bank lockers or premises of the corrupt are not going to yield anything.

White-collar crime has kept pace with the internet revolution and its subset anonymity. It must be conceded that the young and the restless too have patronised bitcoins in the past on the specious premise that even fiat currencies are not underwritten by solid assets; so why cavil at cryptocurrencies, they ask self-righteously. They forget that fiat currencies are at least regulated by central banks.

To be sure, we have not banned cryptocurrencies or VDA for that matter. They are however not legal tender in India. So, they come handy for international transactions and settlements. The government’s new initiative would put the fear of God in those seeking to do shady deals including money laundering. ED would now get access to the records of crypto exchanges.

The putative global initiative that is still work in progress is in sync with the OECD resolve to foil tax evasion by MNCs and others using reinvoicing centers, secretive banks and loose regulations. That of course is more challenging.