Indian cryptoasset regulatory framework has been extremely volatile, and visible discord between government agencies is apparent. In April 2018, the Reserve Bank of India issued a circular that banned RBI-supervised entities from rendering all virtual currency-related services. The circular was an effective prohibition on crypto altogether, and with no available transfer from exchanges to bank accounts, the industry is nearing oblivion.
In 2020, however, this decision was soundly rejected by the Supreme Court. Its judgment pointed to a logical fallacy in “not finding anything wrong in the way exchanges work” while still prohibiting their operations. Unsurprisingly, this earned India the reputation of a “country on the fence,” and, from a legal perspective, cryptocurrency remained an unclaimed territory.
Recent years brought India rapid convergence to global FATF trends, summarized in the motto “regulation over prohibition.” RBI renounced its circular in 2021, and the following year saw a move towards crypto taxation and the beginnings of a Central Bank Digital Currency.
The process culminated in amendments to the Prevention of Money Laundering Act (PMLA) in May 2023. What are the changes for Indian businesses, and how are they complying with these rapidly evolving regulations?
What Changed for Crypto-Oriented Businesses?
Increasingly stringent AML requirements are a global trend that is motivated by the necessity to prevent the flow of crime-related funds through financial systems. In 2022 alone, the total volume of crypto-laundering amounted to $23.8 billion, while DeFi protocol money laundering growth skyrocketed by an astonishing 1,964%.
According to the new amendments, any entity dealing with virtual digital assets (VDA) is considered a reporting entity for AML purposes. Any crypto-related transaction, conversion, storage, or generic financial advice or services falls under VDA. Reporting entities must conduct “Know Your Customer” and “Due Diligence” checks on top of collecting, storing, and reporting transaction information to regulatory authorities.
Indian businesses like Coinswitch and WazirX embraced these regulations, pointing out the positive shift of government crypto recognition. To some, a strict AML environment is a win-win situation: the government combats fraudsters and criminals, businesses enjoy reduced risk of reputational damage, and users don’t need to worry about the source of their funds or the wallets with which they interact.
How can Businesses Comply with New Regulations?
Considering the ambiguous legal status of crypto in the past and how new PMLA amendments are, there can be significant confusion when attempting to comply with new regulations. The first step is to understand the regulatory framework. It isn’t simple and may require professional assistance for clarification. Even understanding a regulation's jurisdiction can be complicated, and thick bureaucracy doesn’t help: AML standards are enforced by the Directorate of Enforcement, Financial Intelligence Unit-India, RBI, Securities & Exchange Board of India, and Insurance Regulatory & Development Authority.
Establishing sound internal AML policies and procedures that satisfy minimum regulatory requirements is also necessary. “In this case, it would be a good idea to resort to companies that offer compliance consulting when setting up in-depth CDD and KYC architecture to verify customer identities, conduct individual risk assessments, monitor user transactions, and update client risk profiles,” comments Slava Demchuk, Co-Founder of AMLBot: a fully-fledged crypto compliance solution that offers AML screening tools, wallet checks, consulting and training for Crypto Asset Service Providers (CASPs).
Train your Personnel on AML
Besides setting up an outlook for the company’s compliance policies, it is also essential to focus on the behavior of your personnel. Firstly, employees themselves may be unwittingly involved in activities that the new regulations consider fraudulent or require reporting. It is necessary to ensure sufficient supervision from the AML officer or upper management.
The business should also provide education and training on compliance practices. This will prevent regulatory issues arising from negligence or failure to act appropriately and improve response time to potential problems.
AML Software as a possible solution
Specific tasks and processes can be better executed and more efficiently through automation. The AML software market is rapidly growing, and solutions like AMLBot can make compliance procedures more time and cost-efficient, prevent your business from missing another round of legislative amendments, and eliminate human error.
“The specifics of implementation are yet to be seen from official clarifications and court cases, but companies must start developing their internal compliance policies and architecture,” Demchuk added. “While large self-sufficient businesses can afford to build up their system from scratch, smaller players should potentially resort to professional assistance in consulting and AML software.”
As policymakers worldwide increasingly recognize the role of virtual currency less as a speculative investment and more as a new asset class, they will inevitably move towards developing strict regulations. The 2023 PMLA amendments will oblige crypto-related businesses to comply with AML rules, and India will not be the last country to pursue such action.