India expects digital currency firms to comply with national money laundering legislation

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Indian firms offering digital currency services are now expected to strictly comply with the provisions of the Prevention of Money Laundering Act (PMLA) of 2002, according to a statement from the Ministry of Finance.

Finance Minister Nirmala Sitharaman announced that local digital currency providers will have to make proper disclosures to the Financial Intelligence Unit India (FIU-IND) as a result of the rules. Aside from making routine disclosures to the FIU-IND, firms must comply with existing Know Your Customer (KYC) rules that currently apply to entities in banking.

“It mandates entities dealing in crypto to follow KYC, anti-money laundering regulations, and due diligence as followed by banking and other financial entities which fall under PMLA,” said Sharat Chandra, co-founder of India Blockchain Forum.

Activities relating to the exchange of digital currencies and fiat by service providers are expected to comply with the money laundering rules. The ministry’s notification also requires compliance in custody services and onboarding new customers.

Chandra hailed the move as the first step in creating a proper regulatory framework, but others have cast aspersions on the grounds that comparing digital currency firms to banks could stifle competition. Nevertheless, extending national money laundering rules to virtual currencies will allow Indian law enforcement agencies to crack down on criminal activities relying on the asset.

Presently, there is a lack of comprehensive digital currency legislation in the country, creating ambiguity for entrepreneurs in the space. In search of regulatory clarity, several Indian founders have left the country to set up operations in new jurisdictions.

Despite the absence of digital currency legislation, the Reserve Bank of India (RBI) has issued multiple warnings to citizens against investing in digital assets as they bear striking similarities with Ponzi schemes. 

“We have also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows, they have no intrinsic value,” RBI Deputy Governor Rabi Sankar.

Tightening the noose for virtual currencies

Critics have pointed out that in the absence of digital currency laws in the country, the executive is using its powers to stifle the growth of the asset class. They cite the example of tough tax burdens imposed on digital currency investors in India.

Currently, Indian investors are expected to pay a 30% tax on digital currency gains with the additional requirement of a 1% tax deductible at source (TDS). All pleas by service providers to the Finance Ministry to reduce the taxes fell on deaf ears as the country plans on using its G20 Presidency to push for global regulations.

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