A Law For Digital Assets – Regulating the virtual digital assets (VDAs) | 23rd December 2022 | UPSC Daily Editorial Analysis

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What's the article about?

  • It argues why, as the G20 president, India should take the lead in regulating virtual digital assets (VDAs) to stop financial crimes including money laundering and terror financing.


  • GS3: Effects of Liberalization on the Economy; Money-Laundering and its prevention; Linkages of Organized Crime with Terrorism.


  • The Union Ministry of Home Affairs recently hosted the “No Money for Terror” conference.
    On the sidelines of this conference, the G20’s Finance Track discussions placed the regulation of virtual digital assets (VDAs) to curb financial crimes such as money laundering and terror financing as a priority.

What are virtual digital assets (VDAs)?

  • VDAs are a type of asset, which are held and transacted digitally.
  • As per Section 2(47)(A) of the Income Tax Act, a VDA includes cryptocurrency, Non-Fungible Tokens (NFTs), and any other digital asset notified by the central government in the official gazette.
  • If a taxpayer has income from the transfer of VDA, they must pay income tax at a flat rate of 30%.


  • Concerns have been raised about the use of VDAs for illicit purposes such as money laundering and terror financing.
  • These concerns stem from a lack of reporting and transparency norms, and an absence of international consensus on regulatory design.
  • This allows bad actors to engage in unchecked transactions and defraud investors.

India’s role as G20 President:

  • As one of the highest-ranked countries in terms of VDA adoption, and now with the G20 presidency, India has a critical role to play in shaping the global regulatory environment.
  • In the short term, India should work with stakeholders to give anti-money laundering (AML) authorities visibility over VDA transactions as well as the authority to impose controls and prosecute in the event of misuse.
    • The Financial Action Task Force Guidelines on Virtual Asset Transactions (FATF Guidelines) can be useful.

Financial Action Task Force Guidelines on Virtual Asset Transactions (FATF Guidelines):

  • Several jurisdictions, including the EU, Japan, and Singapore, have adopted them.
  • The FATF prescribes minimum AML/CFT standards that countries should employ to prevent the likelihood of misuse, and the FATF Guidelines prescribe the same for VDA transactions.
    • AML= anti-money laundering and CFT= Combating the Financing of Terrorism
    • These AML/CFT Standards set the minimum and mandatory benchmarks to prevent, detect, and investigate money laundering and financing of terrorism, and to control and manage related risks.
  • The Guidelines are applicable to VDA service providers of member states like India.
  • Key features of the FATF Guidelines include licence/registration requirements and extensive reporting and record-keeping obligations for VDA service providers.
    • One such obligation is the “Travel Rule”, which requires service providers to record the originator and beneficiary’s account details, transaction amount, and purpose of transaction for all wire transfers.
    • Customer due diligence obligations, which include verifying the customer and beneficiary’s identities should be conducted for all transactions exceeding $1,000.
  • The FATF Guidelines also require VDA service providers to perform enhanced due diligence obligations (such as corroborating the customer’s identity with a national database or potentially tracing the customer’s IP address to ensure there are no links to illicit activities) when a transaction is with a higher-risk country.

India’s existing AML/CFT framework under the Prevention of Money Laundering Act, 2002 (PMLA) already applies these regulatory tools over traditional financial institutions. Notably, the PMLA also includes reporting obligations for overseas transactions that fall under the ambit of “suspicious transactions” under the framework.

  • Currently, the PMLA does not apply to the VDA industry.
    • The government has the power to notify any “designated business or profession” as a reporting entity under the PMLA and can issue a notification that classifies VDA service providers as a designated business.

Way Forward:

  • In this context, PM Narendra Modi’s mantra of creating “global solutions” to address global problems posed by fast-changing technology is important.
  • The time is ripe to extend regulatory oversight over the VDA industry so as to ensure that tech-innovation flourishes in a responsible, accountable manner.

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