Exchanges, Intermediaries Directed By Finance Ministry To Perform KYC Of Clients

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The Finance Ministry on March 7 announced that intermediaries and exchanges dealing in virtual digital assets (VDAs) in India will be required to perform KYC on their clients and users. These entities will now be considered ‘reporting entities’ under the Prevention of Money Laundering Act (PMLA). This includes entities that engage in exchanging VDAs and fiat currencies, transferring VDAs, safekeeping and administering VDAs, and participating in financial services related to an issuer’s offer and sale of a VDA.

Under the PMLA, reporting entities must maintain records of their clients’ and beneficial owners’ KYC details, account files, and business correspondence relating to clients. The records of all transactions must be maintained for at least five years. These regulations are part of the Indian government’s effort to develop policies around the crypto sector.

Currently, entities involved in the real estate and jewellery sectors, as well as casinos, are considered reporting entities under the PMLA. Every reporting entity is required to maintain records of all transactions, including cash transactions of more than Rs 10 lakh. They must also maintain records of all series of cash transactions integrally connected to each other, which have been individually valued below Rs 10 lakh, where the monthly aggregate exceeds Rs 10 lakh, among other records.

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Some have welcomed the move to bring VDA transactions under the PMLA in the industry, such as CoinSwitch co-founder Ashish Singhal. However, it remains to be seen if further regulations will be introduced. Digital-asset platforms globally are required to follow anti-money laundering standards similar to those followed by other regulated entities like banks or stock brokers.

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Digital currency and assets like non-fungible tokens have gained traction globally in recent years, leading to an increase in trading in these assets. However, India did not have a clear policy on regulating or taxing such asset classes until last year. The 2022-23 budget introduced a 30 per cent tax on income from transactions in VDAs, and a 1 per cent TDS on transactions in such asset classes above a certain threshold was imposed to bring such assets under the tax net. Gifts in crypto and digital assets were also taxed.

(With inputs from PTI)

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