Crypto Exchanges Could Benefit From New Reporting Rules

On Tuesday, the Finance Ministry notified that the exchange, transfer, safekeeping or administration of cryptocurrencies will come under the purview of the Prevention of Money Laundering Act (PMLA).

After witnessing several investigations by the Enforcement Directorate (ED), crypto exchanges are likely to find it easier to operate as the regulation recognizes them as reporting entities, bringing them at par with some regulated bodies. The Act defines reporting entity as a banking company, financial institution, intermediary or a person carrying on a specified business or profession.

“To identify suspicious transactions and weed out bad actors, the latest notification will now put these exchanges at par with a banking company, financial institution or intermediary,” said Alipak Banerjee, leader (international dispute resolution practice), Nishith Desai Associates.

Banerjee said, crypto exchanges will be required to meet rigorous due diligence requirements under the PMLA and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, which set reporting thresholds and the manner in which reporting is to be done. According to him, while the Supreme Court in a 2020 case had affirmed the fundamental right to trade and conduct business of virtual currency exchanges, the ED in several cases treated these exchanges as ‘users’ and froze them. 936 crore as of January 31, according to government figures.

A spokesperson for crypto exchange Coinswitch said the new rules have been introduced to prevent misuse of crypto such as money laundering.

Others said it opens the exchange up to more scrutiny and that they require records of customer transactions for reporting requirements.

“It can be safely interpreted from the notification, that the exchanges will now have to keep record of every customer and transaction in virtual digital asset as if they fail to explain even a single transaction, they will have to bear the brunt of ED directly or indirectly commit the offense of money laundering,” said Tushar Agarwal, a lawyer in the Supreme Court.

Agarwal pointed out that based on this notification alone, it cannot be said with certainty whether the government is planning to legalize or ban cryptos. Questions about the legality of cryptos, Agarwal said, were being discussed even at a time when the Union Budget had stated that such digital assets would attract 30% tax; However, the ministry later clarified that levying a tax does not make it valid.

“The crypto asset sector and the Web3 sector are relatively new and still developing. Currently, there are no specific regulations for these sectors,” Finance Minister Nirmala Sitharaman informed the Lok Sabha in a statement on February 13.

In fact, when asked how the government will ensure the protection of the interests of customers in virtual digital assets, Sitharaman said that the Reserve Bank of India (RBI) is warning users, holders and traders that transactions in such assets are fraught with potential risks. is connected. RBI Governor Shaktikanta Das has expressed his concern over cryptocurrencies several times, citing macroeconomic and financial stability risks.

Experts also said that the government’s move would help in developing a standardized protocol for crypto regulations and saw it as a step towards legalizing crypto in India. The move is seen as a progressive step towards the gradual legalization of cryptocurrency in India. The question is not whether the government is keeping a close watch, but whether such transactions or transactions in crypto are protected. should go and fraud should be minimized,” said Anoushka Arora, Principal and Founder, ABA Law Office.