India’s Financial Intelligence Unit (FIU-IND) has rolled out updated guidelines relating to Anti-Money Laundering (AML) and Know Your Customer (KYC) protocols for cryptocurrency exchanges, according to an Indian Express report.
The new guidelines include mandatory liveness detection, as well as geographical tracking when cryptocurrency exchanges onboard users.
As per the new rules, users on cryptocurrency platforms must take a ‘live selfie’ using software that verifies their presence through either blinking their eyes or movement of their head.
Furthermore, crypto exchanges – referred to as virtual digital asset service providers (VDA SPs) in the guidelines – must record the geographical coordinates, date, timestamp, and IP address from which a user initiates the creation of an account.
With these updated guidelines, the FIU-IND – which operates under the aegis of the Union Finance Ministry – is visibly toughening its stance against tools that help in masking or concealing the paper trail of cryptocurrency wealth.
For context, the FIU-IND is the single-point regulator for cryptocurrency exchanges operating in India under the provisions of the Prevention of Money Laundering Act (PMLA).
What Does The FIU-IND Mandate In The Updated Guidelines?
For Users
Users must now provide either their passport, Aadhaar card, or voter ID card in addition to their PAN (Permanent Account Number) card while registering on cryptocurrency exchanges. They must also verify their email ID and phone number via the OTP verification method.
For Crypto Exchanges
In addition to liveness detection and geographical tracking, FIU-IND has mandated the penny drop method for cryptocurrency exchanges when they onboard new users. This method consists of processing a nominal Re 1 transaction in order to confirm that a particular bank account is active and belongs to the registrant.
All cryptocurrency exchanges must register with the FIU-IND as reporting entities (RE) and submit periodical reports on suspicious transactions. They must also maintain records of their clients to identify and combat money laundering, terror financing and proliferation financing risks associated with crypto assets. The guidelines also ask exchanges to preserve client IDs, their addresses and transaction details for at least five years and retain them until an investigation is closed.
To explain, proliferation financing risk refers to the potential exposure or vulnerability of financial institutions, businesses, and individuals to activities that support the proliferation of weapons of mass destruction (WMD) and their delivery systems.
Meanwhile, the FIU-IND has also asked cryptocurrency exchanges to perform KYC updation for “high-risk” clients every six months. Exchanges can perform this KYC updation for all other clients on an annual basis.
Cryptocurrency exchanges must also collect details from open sources and consult independent databases for high-risk individuals. Additionally, exchanges must perform enhanced due diligence for entities that have links to tax haven countries or jurisdictions named under the FATF grey or black list.
FIU-IND Looking To Curb ICOs and ITOs?
The new FIU-IND guidelines aim to discourage Initial Coin Offerings (ICOs) and Initial Token Offerings (ITOs). The updated guidelines state that these activities present “heightened and complex” money laundering and terror financing risks as they lack a justified economic rationale.
An ICO is a fundraising method that involves issuing a new cryptocurrency or token to investors in exchange for their monetary investment in the business. This method gained popularity during the cryptocurrency boom of 2017 and has since become a common way for startups to secure monetary funding.
Notably, ITO is also a fundraising mechanism that companies use to raise capital, but the key difference lies in the nature of the tokens that companies offer. The tokens in an ITO represent some form of utility or usage rights within the project’s ecosystem. For example, a gaming platform might offer tokens that can be used to purchase in-game items or unlock special features.
Cryptocurrency Transactions And Taxation Efforts In India
The updated FIU-IND guidelines for cryptocurrency transactions come in the wake of the Centre divulging last year that no real-time system exists to match tax returns with transaction data that cryptocurrency exchanges submit.
The government had not estimated how much revenue may be lost due to the under-reporting of cryptocurrency transactions, although the Income Tax department levies a 30% tax on gains from cryptocurrency sales as per India’s Income Tax Act, and the government has collected over Rs 700 crore in taxes from cryptocurrency income in FY23 and FY24.
The Income Tax Department officials recently met the Parliamentary Standing Committee on Finance to flag major risks associated with virtual digital assets (VDAs). They highlighted that decentralised exchanges, anonymous wallets, and the cross-border nature of cryptocurrency transactions complicate taxation efforts.
As mentioned earlier, a 30% tax is levied on gains from cryptocurrency sales in line with India’s Income Tax Act. Importantly, crypto traders in India are unable to offset gains with losses from other transactions, as tax loss harvesting is not permitted. A tax loss harvesting involves selling securities at a loss to offset capital gains from other investments, thus helping reduce an investor’s overall tax liability.
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