The Financial Intelligence Unit India (FIU IND) recently issued show-cause notices to offshore Virtual Digital Asset Service Providers (VDA SP).
Why did FIU IND act against virtual asset providers?
- The compliance notices were issued for operating illegally without complying with the provisions of the Prevention of Money Laundering Act, 2002 (PMLA).
- This action is part of an initiative to bring Virtual Digital Asset Service Providers (VDA SP) under Anti-Money Laundering and Counter Financing of Terrorism (AML-CFT) framework.
- Financial Intelligence Unit India (FIU IND) instructed the Secretary, Ministry of Electronics and Information Technology to block URLs of the mentioned entities.
- FIU IND is the central agency that processes information relating to suspect financial transactions to enforcement agencies and foreign FIUs.
Premise of Non-Compliance:
- In March 2023, the VDA SP in India were mandated to comply with the PMLA 2002, verify client identities, and record financial positions.
- Entities failing to register and comply, despite serving Indian users, face regulatory action, leading to show-cause notices and blocking of URLs.
PMLA Compliance Purpose:
- PMLA compliance aims to monitor and track financial transactions, combating money laundering and terrorism financing.
- It ensures accountability, transparency, and addresses concerns about the potential misuse of crypto assets.
Global Regulatory Approaches:
- Dubai’s Virtual Assets Regulatory Authority (VARA): It fosters consumer protection and prevents illicit finance and calls for mandatory licences and compliance with AMT-CLF laws.
- European Union’s Markets in Crypto-Assets Regulation (MiCA): Significant service providers must disclose energy consumption, contributing to a reduction in carbon footprint.
- United States Regulation: The U.S. lacks a comprehensive nationwide regulatory framework, but covers some aspects under Bank Secrecy Act and Anti-Money Laundering Act.
Considerations for Regulating VDAs:
- The Bureau for International Settlements (BIS) suggests three high-level policy options: outright ban, containment, and regulation.
- Outright bans may lack enforceability, leading to loss of market visibility.
- Containment may not address inherent vulnerabilities and pose financial stability risks.
- Regulation requires careful consideration of benefits outweighing costs, particularly defining authority, scope, and addressing data gaps.
What are Virtual Digital Asset Service Providers (VDA SP)?
- VDA SP are entities involved in activities like exchanging virtual digital assets and fiat currencies, transferring virtual digital assets, and safekeeping or administering VDAs.
- These services may include virtual asset exchange, transfer, safekeeping, etc.
- VDA SPs play a role in the virtual asset ecosystem by providing platforms for buying, selling, and managing digital assets.
- They are subject to regulatory frameworks and compliance measures to ensure transparency, security, and adherence to anti-money laundering and counter-financing of terrorism regulations.
About Anti-Money Laundering and Counter Financing of Terrorism (AML-CFT):
- This framework is a set of policies and measures that aim to prevent and combat crimes like Money Laundering and Terror Financing.
- Money Laundering is the processing of assets from criminal activity to obscure their illegal origins.
- Terrorism Financing involves the raising and processing of funds to supply terrorists with resources.
- Its goal is to protect the stability and integrity of the global financial system and financial markets.
- The AML/CFT Policies and Procedures manual is a formal document that outlines the policies, controls, and procedures for implementation and related regulations.
- Key elements of an effective AML/CFT compliance program:
- Risk assessment
- Training of AML/CFT experts
- Employing qualified compliance professionals
- Customer due diligence (CDD)
- Transaction monitoring
- Verifiability and compliance
- Reporting and record-keeping
Ref: Source
| UPSC IAS Preparation Resources | |
| Current Affairs Analysis | Topperspedia |
| GS Shots | Simply Explained |
| Daily Flash Cards | Daily Quiz |