Crypto Assets are borderless, require international collaboration to prevent regulatory arbitrage

Under PMLA, Rs. 936 crore related to crypto currency is attached/seized/freezed by ED as on 31.01.2023

Crypto Assets are by definition borderless and require international collaboration to prevent regulatory arbitrage. This was stated by the Union Minister of State for Finance, Shri Pankaj Chaudhary, in a written reply to a question in Lok Sabha today.

Therefore, the Minister stated, any legislation for regulation or for banning can be effective only with significant international collaboration on evaluation of the risks and benefits and evolution of common taxonomy and standards.

The Minister stated that the Directorate of Enforcement is investigating several cases related to crypto currency frauds wherein a few crypto exchanges have also been found involved in money laundering. Necessary action as per provisions of Prevention of Monyt Laundering Act, 2002 (PMLA) has been taken by the Directorate of Enforcement. As on 31.01.2023, proceeds of crime amounting to Rs. 936 crore have been attached/seized/freezed, 05 persons have been arrested and 06 prosecution complaints (PCs) including 01 supplementary PC have been filed before the Special Court, PMLA in these cases.

Further, the Minister stated, under Foreign Exchange Management Act, 1999 (FEMA) assets amounting to Rs. 289.28 crore have been seized under section 37A of FEMA and 01 Show Cause Notice to cryptocurrency exchange Zanmai Labs Pvt Ltd, known as WazirX and its directors under FEMA for transactions involving cryptocurrencies work Rs. 2,790 crore has also been issued.

Giving more information, the Minister staetd that RBI has been cautioning users, holders and traders of Virtual Currencies (VCs) vide public notices on December 24, 2013, February 01, 2017 and December 05, 2017 that dealing in VCs is associated with potential economic, financial, operational, legal, customer protection and security related risks. RBI, vide its circular dated May 31, 2021 has also advised its regulated entities to continue to carry out customer due diligence processes for transactions in VCs, in line with regulations governing standards for Know Your Customer (KYC), Anti- Money Laundering (AML), Combating of Financing of Terrorism (CFT), obligations under Prevention of Money Laundering Act (PMLA), 2002, etc. in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act (FEMA) for overseas remittances.

International collaboration is essential to regulate borderless crypto assets and prevent regulatory arbitrage through AML and KYC enforcement. Crypto assets are borderless and require international collaboration for effective regulation, common taxonomy and standards. Domestic enforcement has pursued crypto related money laundering and foreign exchange violations: investigations under the Prevention of Money Laundering framework have led to asset restraints, arrests and prosecutions, while foreign exchange actions include asset seizures and show cause proceedings; the central bank has warned users and directed regulated entities to apply KYC, AML and CFT controls and comply with foreign exchange obligations for virtual currency transactions.