VDA activities subject to AML compliance in India

VDA activities subject to AML compliance in India

Virtual digital assets (VDAs) are digital representations of value that can be traded, transferred, or used for payment using digital means. Several types of VDAs have been developed recently, and many service providers are working to facilitate transactions concerning them.

This has increased the ambit of the rapidly growing VDAs, opening a new area for financial crimes. Therefore, it was necessary to include certain activities related to VDAs facilitated by Virtual Digital Asset Service Providers (VDASPs) within the AML landscape.

Using its power under the Prevention of Money Laundering Act, 2002 (PMLA), the Government of India included VDA transactions under the ambit of AML compliance.

The Government of India a list of activities involving VDA that must meet AML compliance requirements as prescribed under PMLA when such activities are carried out by the VDASPs on behalf of or for the natural or legal persons in the course of business.

Here is the list of such VDA activities undertaken by VDASPs that shall be subject to AML compliance in India:

  1. Exchange between virtual digital assets and fiat currencies.
  2. Exchange between one or more forms of virtual digital assets.
  3. Transfer of virtual digital assets.
  4. Safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets.
  5. Participation in the issuer’s offer and sale of a virtual digital asset.

The inclusion of these activities was warranted for various reasons. The following are a few characteristics that made VDAs vulnerable to ML/FT risks and necessitated their bringing VDA within the AML regulatory landscape:

High customer anonymity

VDA transactions have a high degree of customer/user anonymity, providing a platform for criminals to facilitate financial crimes without disclosing their identity. Such anonymity creates opportunities to use VDAs for illegal activities without worrying about being identified or tracked.

No settled regulatory framework governing VDAs

Transfers of VDAs pose challenges due to the absence of a regulatory framework, potentially hindering oversight and accountability. Without settled regulations, criminals can exploit and engage in illicit activities. Stringent and consistent regulatory frameworks are required at local and international level to address these gaps and ensure the integrity of VDA transactions.

Decentralised operating network

VDAs operate on decentralised networks as there is no central authority overseeing and supervising VDA transactions. Due to the decentralised network, it is difficult to monitor and regulate transactions, which increases the risk of ML/FT activities.

Easy transferability, with global reach

VDAs are easily transferrable without friction, providing a channel for criminals to move their funds easily and quickly internationally without any examination.

Easy conversion (VDA to fiat and vice versa)

VDAs are easily converted into fiat currencies and vice versa via online platforms and exchanges. With such ease of conversion, criminals could launder their illicit funds through unauthorised conversion to conceal the source of funds.

Transactional complexity (multiple VDA wallets, multiple jurisdictions)

Because of their digital nature, VDA transactions involve various layers of complexity, such as multiple wallets, jurisdictions, and IP addresses. Criminals can easily exploit these complexities to conceal their activities, making monitoring and regulating VDA transactions challenging.

Therefore, to address these exposures, the Government of India included relevant activities under the AML compliance purview to mitigate ML/FT risks surrounding VDA transactions.

We are committed to assisting proper enforcement of AML and CFT regulations to regulated entities in India by designing a personalised AML framework – policies, internal controls, and procedures – and ensuring effective implementation of the same.

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