Crypto regulation a welcome step

The government’s decision to create a regulatory framework for crypto assets is an important step towards creating a rule-based system in an area of finance that has been mostly unmanaged. It was decided last week to bring the intermediaries dealing with crypto assets within the ambit of the Prevention of Money Laundering Act (PMLA). They will now have to ensure that KYC standards are followed, as in the case of other assets, and report suspicious transactions. Crypto assets have steadily increased in the last few years, and they have registered a steep increase after the Covid pandemic. India, with an estimated 98 million crypto owners, is number one in the world in their ownership. That makes it important to regulate their transactions because there is a possibility of misuse, which can damage the economy. Crypto assets can hurt the economy just as black money can.

By bringing crypto trading platforms under the PMLA, it will be possible to check money laundering through crypto exchange transactions to a large extent. It will also help to ensure that the exchanges maintain detailed records which can be shared with the enforcement authorities. These records can be shared with authorities in other countries after an international accord is signed on crypto trades on exchanges. If money laundering with crypto assets is detected, the penalties will include large fines, imprisonment up to seven years, and seizure and attachment of assets. This can act as a deterrence against trade in crypto assets. Crypto trading as such may be disincentivised because of the high compliance burden for the intermediaries. Trading platforms will have to closely track all transactions and report suspicious dealings to the enforcement authorities. Trading volumes have already declined as a result of some recent measures taken by the government. Most players may find it difficult to keep functioning when they have to meet such onerous conditions and when violations carry heavy penalties.

Illegal transactions have been detected in the past. The government told the Lok Sabha recently that some crypto exchanges had been found money laundering, and assets worth Rs 936 crore had been seized as on January 31. Crypto assets can be misused in many ways, especially because of their anonymity and the speed of transactions across national borders. Some countries have banned them, others have tried to regulate them, and yet others are considering how to deal with them. This situation is likely to be exploited. There is the need for a regulatory system with globally recognised and accepted principles and procedures. The government’s intention now seems to be to regulate the trade but not to ban it altogether. A ban may push the trade underground.