By: Rajagopal Menon, Vice President, WazirX
The rise of cryptos and their increasing popularity around the world could result in a paradigm shift in how people transact and conduct financial activities. Because of its decentralised nature, anonymity, and security characteristics, cryptos have emerged as a desirable asset beyond the nerds and have started trickling down to the general population. At the end of the day, cryptos have value. The very reasons for its popularity have also attracted some bad actors who use it for illicit activities. Money, like any other technology, can be used for either good or evil. Just like a mobile phone can be used by a policeman and a bank robber, just like a TV channel can be used for good and bad purposes, similarly, how crypto can be used and misused.
Over the years, governments and regulators have codified rules and regulations to govern the banking and financial sectors. AML (Anti-Money Laundering) norms for finance and banking refer to the set of guidelines and regulations put in place by regulatory bodies and financial institutions to prevent the misuse of the banking system for illegal activities such as money laundering and terrorist financing. AML norms are designed to ensure that banks and financial institutions comply with all applicable laws and regulations related to these activities and that they have effective procedures and controls in place to prevent, detect, and report any suspicious activity. These include Customer Identification, Know Your Customer (KYC) Norms, Customer Due Diligence (CDD), Transaction Monitoring, Suspicious Activity Reporting, Training and Awareness and Risk Assessment. Most of these measures were implemented by crypto exchanges voluntarily because they are the best practices to be followed.
Recently, the Indian government has decided that crypto would be subject to the Prevention of Money Laundering Act (PMLA), which is intended to combat illicit activities. This change was long overdue and now makes it mandatory for all exchanges to follow AML processes for a variety of reasons.
To begin with, crypto transactions are inherently pseudo-anonymous, making tracking the source and destination of funds difficult. By placing crypto under the purview of the PMLA, the government can guarantee that companies adhere to strict KYC (Know Your Customer) standards and retain a record of all transactions, making it easier to identify suspicious behaviour and prevent money laundering.
Second, the global nature of cryptos makes effective regulation difficult for any single government. Because of this lack of regulation, cryptos could be used by bad actors to shift funds across borders without being detected. By incorporating crypto exchanges under the PMLA, India is taking an important step towards regulating cryptos and limiting their misuse.
Third, the increasing popularity of cryptos has increased criminality and fraud. By placing crypto companies under the purview of the PMLA, the government can ensure that companies are held accountable for any fraudulent actions that occur on their platforms, resulting in a safer environment for users.
Fourth, the lack of clarity surrounding crypto’s legal status has made it difficult for businesses and investors to operate in this field. The government may give much-needed clarity on the legal and regulatory environment for cryptos by putting crypto companies under the PMLA. Because of this, more entrepreneurs and investors will get involved, which will lead to more growth and innovation.
To sum up, the decision to include crypto exchanges in the PMLA is a good and long-overdue step. By imposing taxes in 2022 and now placing crypto exchanges under the purview of the PMLA, the government is slowly but surely taking baby steps towards crypto regulation.
By the Vice President of WazirX
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