Tightening The Noose: Cryptocurrency In India

• Published date: 03 April 2024
• Subject Matter: Technology, Fin Tech
• Law Firm: Khaitan & Co LLP
• Author: Mr Kartikey Mahajan, Aayushi Singh and Satjit Singh Chhabra

In India, cryptocurrencies have gone unregulated for a very long time. While the issues relating to taxation of cryptocurrency has been relatively easier to address, the concerns arising from the anonymous and decentralised character of cryptocurrencies have been difficult to tackle. The untraceability and anonymity offered by cryptocurrencies also make it ideal for unlawful activities such as money laundering and terrorist financing.

India, in line with other countries, has updated several laws mandating reporting of virtual digital assets to account for the changing dynamics of the financial environment. Additionally, the purview of the Prevention of Money Laundering Act, 2002 ("PMLA") has been expanded to include transactions pertaining to virtual currency assets such as different exchanges, transfers, and administrative actions connected to virtual digital assets. However, due to the information being scattered, there remains a lot of ambiguity and lack of clarity on the laws applicable to cryptocurrency in India. Some of the frequently asked questions about the nature of these cryptocurrency assets and the legal regime applicable are addressed below:

What are Virtual Digital Assets ('VDAs')?

The term virtual digital asset is defined under Section 2(47A) of the Income Tax Act, 1961, to include the following:

• any information or code or number or token (not being Indian currency or foreign currency) which meets certain conditions;
• non-fungible token or any other token of similar nature, by whatever name called; or
• any other digital asset, as the government may specify by way of notification.

To simply put, VDAs include cryptocurrency as well as non-fungible tokens ('NFT').

Are VDAs covered under the PMLA?

On 7 March 2023, the Ministry of Finance, in a notification, expanded the definition of 'person carrying on designated business or profession' under the PMLA to include trading of cryptocurrency and VDA intermediaries ('VDASPs') within the scope of PMLA (see Notification No S.O. 1072(E), Ministry of Finance). Accordingly, cryptocurrency exchanges and other VDA SPs have now come under the definition of 'Reporting Entities' under the PMLA ('RE'). This means that such VDA SPs now must also comply with rules relating to anti-money laundering regulations and disclosure regime applicable to other REs. Put simply, the regime that applied to a banking companies, financial institutions, intermediaries, or persons carrying on a designated business or profession...