Why did FIU IND act against virtual asset providers
- The Financial Intelligence Unit India (FIU IND) recently issued show-cause notices to nine offshore virtual digital asset service providers (VDAs).
- Reason: For alleged non-compliance with the Prevention of Money Laundering Act, 2002 (PMLA).
Premise of Non-Compliance
- In March 2023, India mandated VDAs to comply with PMLA, verifying client identities and maintaining records of financial positions.
- Non-registration of these entities made them non-compliant despite serving Indian users.
- The regulatory objective is to monitor and track financial transactions, curbing money laundering and terror financing.
- Adherence to KYC mandates benefits VDAs by addressing regulator concerns about anonymity in crypto assets and potential unlawful use.
Global Regulatory Approaches
- Dubai Virtual Assets Regulatory Authority (VARA)
- Dubai's regulatory regime includes a licensing framework, fostering consumer protection and preventing illicit finance.
- Mandatory licences are categorised based on the services offered, with an obligation to comply with AML-CFT laws.
- European Union (EU) - Markets in Crypto-Assets Regulation (MiCA)
- MiCA aims to establish uniform EU market rules for crypto-assets, focusing on transparency, disclosure, authorization, and supervision.
- It addresses market manipulation, money laundering, terrorist financing, and consumer protection.
- Service providers require authorization, and significant providers must disclose energy consumption.
- United States
- The US lacks a comprehensive nationwide regulatory framework.
- Some digital assets and activities fall under existing regulations like the Bank Secrecy Act and the Anti-Money Laundering Act of 2020.
Considerations and Approaches in VDA Regulation
- The Bureau for International Settlements (BIS) identified three high-level policy options for regulating crypto assets viz. outright ban, containment and regulation.
- Outright Ban: May not be enforceable due to the pseudo-anonymous nature of crypto markets, leading to reduced transparency.
- Containment
- Involves controlling flows between crypto markets and traditional financial systems.
- However, it may not address vulnerabilities in crypto markets and could pose financial stability risks.
- Regulation
- The benefits of regulating and supervising VDAs must outweigh associated costs.
- Key considerations for emerging market economies include defining regulatory authority, determining the scope of regulation, and addressing data gaps.
Conclusion
- Regulating virtual assets is a global challenge with varying approaches.
- The considerations for regulation include balancing benefits and costs, understanding technology, and ensuring effective supervision.
- India's recent actions underscore the importance of regulatory compliance in the rapidly evolving virtual asset landscape.