Author: Priyanshu Pareek
University: JECRC UNIVERSITY
Abstract
The rapid proliferation of cryptocurrency as a medium of financial exchange has outpaced India,s regulatory response, creating significant vulnerabilities in the anti-money laundering(AML) and counter-financing of terrorism(CFT) architecture. While the amendment in march 2023 bringing VDA service providers under PMLA the represent a meaningful legislative step, this article argues that it is structurally insufficient. The three critical gaps persist: first, the absence of a licensing or registration regime for crypto exchanges leaves FIU-IND reporting obligations without enforcement backbone, second, FEMA’s definitional framework does not unambiguously classify cryptocurrency as ‘foreign exchange’. ‘currency’, or capital account transaction’, creating regulatory ambiguity fir cross-border crypto flow; and third, India’s not-implementation of the FATF travel rule for VASPs means that transaction-chain tractability the cornerstone of effective AMl remains absent. Drawing upon supreme Court’s judgement in Internet and mobile Association of India v. Reserve Bank Of India(2020) 10 SCC 274, the enforcement actions, and comparative frameworks including the EU’s markets in Crypto-Assets(MiCA) regulation and FATF Guidance for Virtual Assets(2021), this article advocates for a comprehensive VDA Regulation Act to bridge India’s legislative gap before cryptocurrency becomes the preferred vehicle for financial crime.
The proof
- Scale of crypto-related financial crime in India
The Enforcement Directorate (ED) has, in recent years, filed multiple prosecution complaints under PMLA involving cryptocurrency. In 2022-23, the Ed attached crypto assets worth-over Rs. 900 crore in the HPZ Token Ponzi scheme case, one of India’s largest crypto-fraud prosecutions. In the WazirX hack of July 2024, approximately $235 million (Rs.1,900 crore) centralized exchange and difficult of AMl recovery in a Pseudonymous ecosystem. These xases demonstrate that the scale of crypto-based financial crime in India has materially outpaced the existing regulatory response.
- FATF’s Adverse Assessment of India’s VDA Framework
In its Mutual Evaluation Report(2023-24), the FATf noted that while India had taken steps to bring VASP’s under PMLA, full implementation of Recommendation 15(new technologies) and recommendation 16 (The Travel Rule) remained incomplete. The FATF specifically flagged the absence of a VASP Licensing Regime and India’s non-enofrcement of Travel Rule as significant deficiencies placing India at risk of enhanced monitoring if remediation is not achived.
- The FEMA Definational Gap
The Reserve Bank of India has not classified cryptocurrency as ‘currency’ under section2(h) of FEMA, 1999, nor as a ‘foreign security’ under section2(i). yet, Indians routinely engage in transactions. In the absence of RBI notification under section 6 of FEMA authorizing such capita laccount transactions, every cross-border crypto transfer in potentially in violation of FEMA yet such transfers are neither systematically monitored nor penalized, creating a compliance vacuum that money launderers readily exploit.
Statutory Provisions
- Prevention of Money Laundering Act, 2002(PMLA)
- Section 3: offence of money laundering whosoever directly or indirectly attempts to indulge or assists in concealing, possessing, or using proceeds of crime commits the offence of money laundering, punishable with rigorous imprisonment of 3-7 years
- Section 2(wa) r/w march 2023 notification: Includes VDA service providers as ‘reporting entities’ obligated to maintain KYc records, file suspicious transaction reports, and register with FIU-IND.
- Section 12: Mandates reporting entities to maintain records of all transactions and verify client identity obligation now applicable to crypto exchanges post the 2023 amendments.
- Section 5: Empowers the ED to provisionally attach property involved in money laundering, including cryptocurrency a power the ED has actively used in HPZ token and WazirX related proceeding.
- Foreign Exchange Management Act, 1999(FEMA)
- Section 2(h)-currecny: It does not include cryptocurrency in its defination, leaving cross-border crypto flows in a defination no-man;s land.
- Section 6-capital account transactions: RBI regulates capital account transactions by notification.
- Section 46- Rule Making Power: the central government may make rules to carry out FEMA provisions this power could be used to specifically classify and regulate cross-border VDA transactions without Awaiting compherensive legislation.
- Income TAx Act, 1961(Finance Act, 2022 Amendments)
- Section 115BBH: Levies 30% flat tax on income from transfer of VDAs with effect from AY 2023-2024; disallows set-off of losses against other income treating VDAs as a distinct taxable assets class.
- Section 194S: manadtes 1% TDS on VDA transfers exceeding Rs. 50.000, creating a transaction-trail mechanism that partially supports AML objectives.
- Other Applicable Frameworks
- IT Act, 2000 – Section 66C & 66D: identify theft and cheating by impersonation using computer resource applicable to crypto phishing, SIM-Swap attacks and exchange account takeover
- Indian Penal Code/ Bhartiya Nyay Sanshita, 2023 -section 318 BNS: cheaating provison applicable to ceypto ponzi schemes and fradulent ICOs where investors are deceived about the nature of VDA investment.
Case laws
- Internet&mobile Association of India V. RBI (2020) 10SCC 274
The Reserve Bank of India, by circular dated April 6, 2018, had directed all entities regulated by it to cease dealing in or providing services to any individual or business entities dealing in virtual currencies. The petitioners crypto exchanges and industry associations challenged this circular before Supreme Court. The Court struck down the RBI circular on the ground of proportionality, holding that the RBI had failed to demonstrate that the harms apprehend from cryptocurrency were of a magnitude that necessitated a complete ban on regulated entities from serving cryptocurrency businesses, as opposed to a more calibrated regulatory response. This judgement implicitly recognized the constitutional right to trade in crypto assets under article 19(1)(g) and established that any regulatory restriction must satisfy the proportionally standard.
- Enforcement Directorate v. Amit Bhradwaj(gain bitcoin case) PMLA proceeding, 2018-2023
Amit Bhradwaj, promoter of GainBitcoin and GB MIners, was arrested by the ED in 2018 for running an alleged cryptocurrency Ponzi scheme defrauding approximately 8,000 investors of Rs. 2,000 crore. The ED attached cryptocurrency and moveable assets under section 5 of PMLA. This case established the first major precedent for cryptocurrency attachment under PMLA and demonstrated the ED’s jurisdiction to treat proceeds of crypto fraud as ‘proceeds of crime’ withinthe meaning of section 2(u) of PMLA.
- ED v. HPZ TOKEN (PONZI Sheme Case) PMLA Attachment, 2022
The ENFORCEMENT DIRECTORATE attached Rs. 910 crore worth of assets including cryptocurrency in the HPZ token case, where the accused operated a mobile application promising returns through crypto mining contracts. The PMLA special courts upheld the attachment, reaffirming that cryptocurrency wallet balance and VDA holding qualify as ‘property’ under section 2(v) of PMLA and are subject to provisional attachment and confiscation.
- Sai Infosystem(India) Ldd. V. Deputy Director(PMLA) 2022
The PMLA appellate tribunal, in this case concerning cryptocurrency converted from proceeds of fraud, held that the burden of proving that attached cryptocurrency did not constitute proceeds of crime rests upon the person claiming such assets. This reversed the practical evidentual burden in crypto attachment proceedings and significantly strengthened burden in crypto attachment proceedings and significantly strengthned the ED’s hand in crypto-PMLA enforcement, while also raising concerns about the due process rights of innocent third-party enforcement, while also raising concerns aout the due process rights of innocent third-party crypto holders whose assets may be caught in the attachment net.
Conclusion
India’s current approach to cryptocurrency regulation under PMLA and FEMA is best described as reactive and piecemeal. The march2023 PMLA amendment and finance act 2022’s VDA taxation provision represent important but inadeqaute first steps. Three structural defciencies demand urgent legislative attention.
First, the absence of a VASP licensing regime means that FIU-IND reporting obligations apply to unregistered entities that may simply cease operations upon scrutiny, rendering AML compliance hollow. A licensing framework analogous to the EU’s MiCA Regulation is essential. Second, FEMA’s silence on cryptocurrency as a category of foreign exchange leaves billions in cross-border crypto flows in a compliance vacuum, depriving India of both revenue and traceability data critical for AML enforcement. An RBI notification under Section 6 of FEMA, or a legislative amendment to Section 2(h), is immediately achievable. Third, India’s non-implementation of the FATF Travel Rule means that the transaction-chain traceability that makes blockchain potentially the most traceable financial system in history is not being leveraged a profound regulatory failure.
The Supreme Court in IMAI v. RBI held that regulation, not prohibition, is the constitutionally sound approach to cryptocurrency. India has accepted that mandate in principle but not in practice. A comprehensive Virtual Digital Assets (Regulation) Act establishing licensing, AML/CFT standards, investor protection, FEMA integration, and Travel Rule implementation is not merely desirable. In the face of FATF scrutiny and growing crypto-based financial crime, it is a matter of national financial security.
Frequently Asked Questions (FAQs)
Q1. Is cryptocurrency legal in India?
Cryptocurrency is neither explicitly legal nor illegal in India. The Supreme Court in IMAI v. RBI (2020) struck down RBI’s banking ban as disproportionate. The Finance Act, 2022 taxes VDAs, implicitly acknowledging their existence. However, no statute specifically authorises or licenses crypto trading, leaving the activity in a legal grey zone.
Q2. Are Indian crypto exchanges required to follow KYC and AML norms?
Yes, since the March 2023 notification amending PMLA Rules, VDA service providers including crypto exchanges, custodian wallet providers, and NFT platforms are classified as ‘reporting entities’ under PMLA Section 2(wa) and must conduct KYC, maintain transaction records, and file Suspicious Transaction Reports (STRs) with FIU-IND.
Q3. Can the Enforcement Directorate seize cryptocurrency?
Yes. The ED can provisionally attach cryptocurrency as ‘proceeds of crime’ or ‘property’ under Section 5 of PMLA. Landmark cases including the GainBitcoin case (2018) and HPZ Token case (2022) confirm that cryptocurrency wallet balances are attachable property under PMLA.
Q4. Is sending cryptocurrency abroad a violation of FEMA?
This is a legally unresolved question. Cryptocurrency is not defined as ‘currency’ or ‘foreign exchange’ under FEMA. RBI has issued no notification under Section 6 of FEMA specifically authorising cross-border crypto transfers as capital account transactions. Until clarification is issued, such transfers occupy a regulatory grey area with potential FEMA exposure.
Q5. What is the FATF Travel Rule and does India follow it?
The FATF Travel Rule (Recommendation 16) requires Virtual Asset Service Providers to collect and transmit originator and beneficiary information for crypto transfers above a threshold (USD 1,000). India has not yet implemented the Travel Rule, a gap noted by FATF in its 2023–24 Mutual Evaluation Report as a significant AML/CFT deficiency.
Q6. What tax do I pay on cryptocurrency profits in India?
Under Section 115BBH of the Income Tax Act (inserted by Finance Act, 2022), income from transfer of VDAs is taxed at a flat rate of 30% plus applicable surcharge and cess, regardless of the holding period. Losses from one VDA cannot be set off against gains from another. Additionally, a 1% TDS is deducted at source on VDA transfers under Section 194S.
