Towards India’s virtual digital assets leadership

(MainsGS3:Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.)

Context:

• Recently, a prominent and far-reaching update has been notified that extends the anti-money laundering provisions to virtual digital assets businesses and service providers.

New notification:

• The Union Finance Ministry extended these activities under the Prevention of Money Laundering Act (PMLA) Act of 2002: exchange between virtual digital assets and fiat currencies; exchange between one or more forms of virtual digital assets; transfer of virtual digital assets; safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets; and participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.
• This means virtual digital assets platforms carrying out the said activities will now have to register as a reporting entity with the Financial Intelligence Unit-India. 
• The unit is the national agency to strengthen India’s efforts against money laundering and terror financing. 
• Reporting entity platforms such as CoinSwitch are now mandated to know your customer, record and monitor all transactions, and report to the Financial Intelligence Unit-India as and when any suspicious activity is detected.

 Step in the right direction:

• Such rules are already applicable to banks, financial institutions and certain intermediaries in the securities and real estate markets. 
• Extending them to virtual digital assets provides virtual digital assets platforms with a framework to diligently monitor and take actions against malpractices. 
• A standardization of such norms will go a long way in making the Indian virtual digital assets sector transparent. 
• It will also build confidence and assurance in the ecosystem, and give the government more oversight on virtual digital asset transactions, which will be a win-win for all.

 Global guidelines:

• These risk-mitigation measures are in line with global guidelines put forward by the International Monetary Fund and the Financial Action Task Force (FATF). 
• FATFhas a comprehensive definition of Virtual Asset Service Providers (VASPs)  , an extensive list covering intermediaries, brokers, exchanges, custodians, hedge funds, and even mining pools.
• Such guidelines acknowledge the role VASPs play in regulating and monitoring the virtual digital assets ecosystem. 
• VASPs are the most efficient bridges and eyes for regulators to effectively implement Anti-Money Laundering/Countering/Combating the Financing of Terror principles.

Reduce tax rates:

• India needs to reconsider its tax treatment of virtual digital assets, which is an outlier, both domestically and internationally. 
• After all, with the PMLA notification now mitigating the most critical money laundering and terror financing risks, there is little reason for the tax rates to be as prohibitively high as they are.
• Perhaps there is an opportunity to bring virtual digital assets taxes on a par with other asset classes. 
• Reducing the tax arbitrage vis-à-vis other economies will also help stem the flight of capital, consumers, investments, and talent, as well as dent the grey economy for virtual digital assets.

Conclusion:

• In Asia, Japan and South Korea have established a framework to licence VASPs, while in Europe, the Markets in Crypto-Assets (MiCA) regulation has been passed by the European Parliament.
• Going forward, a progressive regulatory framework will instil the animal spirit in India’s innovation economy and establish India’s virtual digital assets leadership.