Virtual Digital Asset Regulation

Virtual Digital Asset Regulation

News: The Financial Intelligence Unit India (FIU IND) issued notices to offshore virtual digital asset service providers (VDA SPs) for non-compliance with the Prevention of Money Laundering Act, 2002 (PMLA).

What are VDAs?
• Virtual Digital Assets are digital forms of value like cryptocurrencies and tokens. They are secured using cryptography and blockchain technology. These assets exist only in digital form and can be used for transactions, investments, or as a store of value.
• They usually operate independently of central authorities, which makes them attractive but also prone to risks like money laundering. This has led to calls for regulation and oversight.

How Virtual Digital Assets regulated in India?
• VDA SPs were brought under anti-money laundering and counter-terrorism financing regulations in March 2023. These regulations required VDA SPs to register, verify client identities, and maintain records of financial transactions.
• Non-compliant entities continued to serve Indian users without registration, evading the AML and CFT framework.
• VDA SPs must register with Financial Intelligence Unit India and comply with reporting and record-keeping obligations. Till now, 31 VDA SPs have registered, but several offshore entities serving Indian users remain unregistered.

What is the view of the Bureau for International Settlements (BIS) on the regulation of VDA SPs?
• The BIS observed three main strategies for regulating crypto: outright ban, containment, and comprehensive regulation.
• It also noted that outright bans may not be effective due to the pseudo-anonymous nature of crypto assets.
• The containment approach aims to control interactions between crypto markets and the traditional financial system, yet it may not fully address the vulnerabilities of the crypto market or mitigate financial stability risks.
• BIS suggests that regulation, although challenging, may be necessary to address the inherent risks in the crypto market and maintain financial stability.

What are International regulatory landscapes?
• Dubai’s VARA Model: Dubai’s Virtual Assets Regulatory Authority (VARA) provides a comprehensive licensing framework, emphasizing consumer protection and AML-CFT compliance.
• EU’s MiCA Regulation: The Markets in Crypto-Assets Regulation (MiCA) in the EU focuses on transparency, disclosure, and supervision, requiring service providers to be authorized.

Way Forward
• Regulating virtual digital assets presents a complex balancing act between innovation, consumer protection, and financial stability.
• The varied approaches across jurisdictions highlight the need for global coordination and harmonization in VDA regulations.
• India’s recent actions reflect a proactive stance in aligning with global standards while addressing local concerns.