Syllabus: GS2/ Governance, GS3/ Security
Context
- The Financial Intelligence Unit (FIU), has issued revised Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) guidelines for cryptocurrency exchanges.
Regulatory Status of Cryptocurrencies in India
- Cryptocurrencies are not recognised as legal tender in India.
- Transactions involving crypto assets are taxed under the Income-tax Act.
- Cryptocurrency exchanges are classified as Virtual Digital Asset (VDA) service providers.
- All VDA service providers are regulated under the Prevention of Money Laundering Act (PMLA).
- Financial Intelligence Unit (FIU) acts as the regulator for crypto exchanges operating in India.
Guidelines for cryptocurrency exchanges
- Identity Verification: The exchanges have been directed to collect one more identity and address document of the client– either passport, driving licence, proof of possession of Aadhaar etc. apart from verifying their mobile number and email through a one-time password (OTP).
- A verification of the client’s bank account shall be done through the ‘penny-drop’ mechanism to confirm the ownership and operational status of the account.
- Liveness Detection: Crypto exchanges must capture a live selfie of the user at the time of onboarding, with liveness detection technology, such as eye blinking or head movement.
- This measure ensures that the individual submitting the credentials is physically present and personally initiating the account creation process.
- Geo-Location: Exchanges are required to record the latitude and longitude of the onboarding location.
- The date, timestamp and Internet Protocol (IP) address must also be captured.
- Restrictions on High-Risk Crypto Activities:
- The guidelines strongly discourage Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs). They are viewed as posing heightened risks of money laundering and terrorist financing.
- Transactions involving anonymity-enhancing crypto tokens are not to be facilitated.
- Record-Keeping: Exchanges must preserve customer identity and address details.
- Transaction records must be maintained for a minimum period of five years.
| What Is Cryptocurrency?Cryptocurrency is a digital form of money that uses cryptography for security and operates on decentralised blockchain networks instead of central banks. Key FeaturesDigital and Decentralised: Exists only online and is not controlled by any single authority.Cryptography-Based Security: Uses encryption and public–private keys to secure ownership and transactions.Blockchain Technology: Transactions are recorded on a distributed, tamper-resistant public ledger.Peer-to-Peer System: Allows direct transfer of value between users.Examples: Bitcoin, Ethereum and Altcoins.Blockchain technologyBlockchain technology is a decentralized, distributed ledger system that records transactions across many computers in a way that ensures security and transparency.Blockchain networks rely on consensus algorithms to validate transactions and maintain network integrity. These mechanisms ensure that only legitimate transactions are added to the chain. |
Significance of the New Guidelines
- The revised guidelines bring India’s cryptocurrency regulatory framework in closer alignment with Financial Action Task Force (FATF) standards on virtual digital assets.
- They strengthen India’s ability to prevent money laundering, terrorist financing and proliferation financing risks associated with crypto assets.
Way Ahead
- Greater inter-agency coordination among the FIU, RBI, SEBI and law enforcement agencies is essential to address cross-border crypto risks.
- The use of regulatory technology (RegTech) and supervisory technology (SupTech) should be expanded to improve real-time monitoring and risk assessment.
- Capacity building of enforcement agencies and judicial authorities is necessary for effective investigation and prosecution of crypto-related offences.
Source: BL
