Crypto Firms, Intermediaries Must Perform KYC of Clients: Finance Ministry

Crypto exchanges and intermediaries dealing with virtual digital assets will now be required to perform KYC of their clients and users of the platform. The Finance Ministry on March 7 notified that entities dealing in virtual digital assets will now be considered ‘reporting entity’ under the Prevention of money laundering Act (PMLA). Entities involved in the exchange between VDAs and Fiat currencies or transfer of VDAs or safekeeping and administration of VDAs, and participation in financial services related to an issuer’s offer and sale of a VDA would be ‘reporting entity’ for the purpose of the PMLA.

Under the anti-money laundering law, reporting entities are required to maintain KYC details or records of documents evidencing the identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients. AMRG & Associates Senior Partner Rajat Mohan said all such intermediaries need to maintain a record of all transactions, and such records have to be maintained for a minimum period of five years.

“The Government seems to be working overtime in formulating a policy around the Crypto sector. These regulations would mandate all intermediaries to keep transactional records of VDA. In the next few years, we may see more such regulations for the industry, allowing organised players to enter the sector with bigger investments,” Mohan said.

Currently, apart from banks and financial institutions, entities engaged in real estate and jewellery sectors as well as casinos are considered ‘reporting entities’ under the PMLA. Every reporting entity is required to maintain a record of all transactions, including the record of all cash transactions of more than Rs 10 lakh. Also, they are required to maintain a record of all series of cash transactions integrally connected to each other, which have been individually valued below Rs 10 lakh, where such series of transactions have taken place within a month and the monthly aggregate exceeds Rs 10 lakh, besides other records. As of January 31, the enforcement directorate has attached Rs 936 crore proceeds of crime and arrested 5 five persons related to cryptocurrency fraud.

Crypto investing app CoinSwitch co-founder Ashish Singhal said the notification to bring VDA transactions under the PMLA is a positive step in recognising the sector.

“This will strengthen our collective efforts to prevent VDAs from being misused by bad actors. @CoinSwitch has always prioritized KYC & responsible use of crypto,” Singhal tweeted.

Globally, digital-asset platforms are required to follow anti-money laundering standards similar to those followed by other regulated entities like banks or stock brokers.

Digital currency and assets like NFTs (non-fungible tokens) have gained traction globally over the last couple of years. Trading in these assets has increased manifold with cryptocurrency exchanges being launched. However, India till last year, did not have a clear policy on regulating or taxing such asset classes.

The Budget for 2022-23 brought a 30 per cent tax on income from transactions in VDAs. Also, to bring such assets under the tax net, a 1 per cent TDS (tax deducted at source) on transactions in such asset classes above a certain threshold was imposed. Gifts in crypto and digital assets were also taxed.