Money laundering laws will now cover cryptocurrency trade

Why in News?

  • The government has imposed money laundering provisions on cryptocurrencies or virtual assets as it looks to tighten oversight of digital assets.

What is Cryptocurrency?

  • A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database.
  • It uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
  • It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
  • Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

Why is it in demand?

  • Funds transfer between two parties will be easy without the need of third party like credit/debit cards or banks.
  • It is a cheaper alternative compared to other online transactions.
  • Payments are safe and secured and offer an unprecedented level of anonymity.
  • Modern cryptocurrency systems come with a user “wallet” or account address which is accessible only by a public key and pirate key.
  • The private key is only known to the owner of the wallet.
  • Funds transfers are completed with minimal processing fees.

Significance of Cryptocurrencies:

  • Corruption Check: As blocks run on a peer-to-peer network, it helps keep corruption in check by tracking the flow of funds and transactions.
  • Time Effective: Cryptocurrencies can help save money and substantial time for the remitter and the receiver, as it is conducted entirely on the Internet, runs on a mechanism that involves very less transaction fees and is almost instantaneous.
  • Cost Effective: Intermediaries such as banks, credit card and payment gateways draw almost 3% from the total global economic output of over $100 trillion, as fees for their services.
  • Integrating blockchain into these sectors could result in hundreds of billions of dollars in savings.

Concerns over Cryptocurrencies:

  • Sovereign guarantee: Cryptocurrencies pose risks to consumers. They do not have any sovereign guarantee and hence are not legal tender.
  • Market volatility: Their speculative nature also makes them highly volatile. For instance, the value of Bitcoin fell from USD 20,000 in December 2017 to USD 3,800 in November 2018.
  • Risk in security: A user loses access to their cryptocurrency if they lose their private key (unlike traditional digital banking accounts, this password cannot be reset).
  • Malware threats: In some cases, these private keys are stored by technical service providers (cryptocurrency exchanges or wallets), which are prone to malware or hacking.
  • Money laundering: Cryptocurrencies are more vulnerable to criminal activity and money laundering. They provide greater anonymity than other payment methods since the public keys engaging in a transaction cannot be directly linked to an individual.
  • Regulatory bypass: A central bank cannot regulate the supply of cryptocurrencies in the economy. This could pose a risk to the financial stability of the country if their use becomes widespread.
  • Power consumption: Since validating transactions is energy-intensive, it may have adverse consequences for the country’s energy security (the total electricity use of bitcoin mining, in 2018, was equivalent to that of mid-sized economies such as Switzerland).

Cryptocurrencies in India:

  • In 2018, The RBI issued a circular preventing all banks from dealing in cryptocurrencies. This circular was declared unconstitutional by the Supreme Court in May 2020.
  • Recently, the government has announced to introduce a bill; Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, to create a sovereign digital currency and simultaneously ban all private cryptocurrencies.
  • In India, the funds that have gone into the Indian blockchain start-ups account for less than 0.2% of the amount raised by the sector globally.
  • The current approach towards cryptocurrencies makes it near-impossible for blockchain entrepreneurs and investors to acquire much economic benefit.

What is Money Laundering?

  • Money laundering is defined as the illegal process of converting money generated through criminal activities, such as drug trafficking or terrorist funding, to appear to have come from a legitimate source.
  • The money from the criminal activity is considered ‘dirty’, and the laundering process makes it look clean.

About the Prevention of Money Laundering Act:

  • It was enacted as a response to India’s global commitment (including the Vienna Convention) to curb the menace of money laundering.
  • Objectives of the Act: PMLA was enacted in 2002 and it came into force in 2005, to curb money laundering (process of converting black money into white) and to provide for seizure of property derived from money-laundering.
  • There are mainly 3 objectives of PMLA:
  • To prevent and control money laundering.
  • To confiscate and seize the property obtained from the laundered money.
  • To deal with any other issue connected with money laundering in India.

Dispute redressal:

  • The Adjudicating Authority is appointed by the central government. It decides whether the property attached or seized is involved in money laundering.
  • The Adjudicating Authority shall not be bound by the procedure laid down by the Code of Civil Procedure,1908, but shall be guided by the principles of natural justice and subject to the other provisions of PMLA.
  • Appellate Tribunal: An Appellate Tribunal appointed by the Government is given the power to hear appeals against the orders of the Adjudicating Authority. Orders of the tribunal can be appealed in the appropriate High Court.
  • Special Court: Provision for establishing special court by the Union government under Prevention of Money Laundering Act, 2002 (PMLA).

PMLA (Amendment) Act, 2012:

  • Adds the concept of ‘reporting entity’ which would include a banking company, financial institution, intermediary etc.
  • PMLA, 2002 levied a fine up to Rs 5 lakh, but the amendment act has removed this upper limit.
  • It has provided for provisional attachment and confiscation of property of any person involved in such activities.

What has the Supreme Court said?

  • The very concept of the offence of money-laundering in the Prevention of Money Laundering Act (PMLA) is “very wide” and any activity connected with the proceeds of crime is encompassed within the expression of money laundering under the legislation.
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