The Reason Behind FIU IND’s Crackdown on Virtual Asset Providers

On December 28, 2023, the Financial Intelligence Unit India (FIU IND) issued show-cause notices to nine offshore virtual digital asset service providers (VDA SPs), including Binance, Kucoin, Huobi, Bitfinex and MEXC Global, among others . The FIU IND also wrote to the Secretary at the Ministry of Electronics and Information Technology to block the URLs of these entities for operating illegally without complying with the provisions of the Prevention of Money Laundering Act, 2002 (PMLA) .

Non-compliance with PMLA 2002

In March 2023, VDA SPs in India were brought under anti-money laundering/counter financing of terrorism regulations. They were mandated to comply with PMLA 2002, verify the identities of onboarded clients, and maintain records of their financial positions and potentially suspicious transactions. This obligation applies to all VDA SPs operating in India irrespective of physical presence .

However, several offshore entities that cater to a substantial part of Indian users were not getting registered and coming under the Anti Money Laundering (AML) and Counter Financing of Terrorism (CFT) framework. Currently, 31 VDA SPs have registered with FIU IND .

Purpose of PMLA compliance

The objective of the PMLA and its reporting obligation are to enable monitoring and tracking of financial transactions to curb money laundering and terror financing. Complying with the PMLA 2002 addresses one of the primary concerns of any regulator about the purported anonymity of the crypto assets and their potential use for unlawful purposes.

According to Ranjana Adhikari, Partner at INDUSLAW, mandatory KYC verifications would ensure lack of anonymity and businesses not encountering multiple hurdles. She also argues that the government has made it clear that it intends to enforce PMLA obligations on offshore entities if they satisfy the parameters of the March 2023 notification on VDA SPs.

This is also in line with India’s efforts through the G-20 where it has been advocating for global regulation of cryptocurrency and consequently the framework proposed by the International Monetary Fund and the Financial Stability Board to the G-20 in September 2023 is likely to be actioned in 2024 .

Global regulation of virtual assets

Other countries have also taken steps to regulate virtual assets and their service providers. In Dubai (UAE), they follow a licensing framework that imposes an obligation to comply with AML-CFT laws relevant to “its VA activities, businesses or operations in any jurisdiction at all times”. In the European Union, the Markets in Crypto-Assets Regulation (MiCA) endeavours to institute uniform EU market rules for crypto-assets.



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