Prevention of Money Laundering Act, 2002
Virtual Digital Assets and Proceeds of Crime
A virtual digital asset is not, by itself, anything unlawful: it is property that may be lawfully bought, held, sold and taxed. It becomes a concern of the PMLA in three ways: when it is the proceeds of a scheduled offence, when it is the vehicle through which other proceeds are laundered, and when it is property of equivalent value that can be attached in place of proceeds that have gone abroad. This note explains the legal status of VDAs, the three points of overlap with proceeds of crime, and the PMLA's response.
Where virtual digital assets and proceeds of crime overlap, and the legal and regulatory response
1. The Legal Status of Virtual Digital Assets
§ What the law says • Definition. 'Virtual digital asset' is defined in the Income-tax law (Section 2(47A) of the 1961 Act, carried forward in the new income-tax legislation) to cover cryptographically generated information, codes, numbers or tokens with value, including non-fungible tokens, subject to exclusions. • Property under the PMLA. A VDA is 'property' within Section 2(1)(v): intangible, and wherever located. • Not banned. In Internet and Mobile Association of India v. Reserve Bank of India, (2020) 10 SCC 274, the Supreme Court set aside the RBI's 2018 circular prohibiting regulated entities from providing services to crypto businesses, as disproportionate. • Taxed. The Finance Act, 2022 introduced a flat thirty per cent tax on income from VDA transfers and one per cent tax deduction at source on transfers. • Not legal tender, and not governed by any specific statute regulating or prohibiting crypto assets as such. |
2. Three Points of Overlap
Role | Meaning | Example |
|---|---|---|
VDA as proceeds of crime | The VDA itself is derived from criminal activity relating to a scheduled offence | Crypto obtained by cheating investors in a fraudulent scheme, or paid as ransom in an extortion |
VDA as a laundering vehicle | Fiat proceeds are converted into VDAs and moved to obscure the trail; the VDAs acquired become proceeds too | Bribe money used to buy crypto on a peer-to-peer platform and sent to an offshore wallet |
VDA as equivalent value | Lawfully held VDAs may be attached as property of equivalent value where the actual proceeds are abroad or cannot be traced | Attachment of an exchange balance to match proceeds held outside India |
3. Why VDAs Suit Laundering
i. Speed and borderlessness: value moves across the world in minutes.
ii. Pseudonymity: wallets are not in names, though the blockchain record is permanent.
iii. Obfuscation tools: mixers, tumblers and privacy coins break the transaction trail.
iv. Unregulated channels: peer-to-peer trades and offshore exchanges outside Indian oversight.
4. The PMLA's Response
§ Regulation and enforcement Reporting entities. Since March 2023, persons carrying on exchange, transfer, safekeeping and related activities in VDAs for others are reporting entities, bound by KYC, record-keeping, reporting, and the travel rule. Registration. VDA service providers, including offshore providers serving Indian users, must register with FIU-IND; from December 2023, FIU-IND acted against unregistered offshore platforms. Attachment and freezing. Wallets and exchange balances may be attached under Section 5 or frozen under Section 17(1A), as the ED has done in cases involving crypto exchanges. The taint follows the asset. Conversion from fiat to crypto, from one crypto to another, or across chains does not cleanse proceeds of crime. |
5. Frequently Asked Questions
Are virtual digital assets proceeds of crime?
Only if derived from criminal activity relating to a scheduled offence, or used to launder such proceeds. Lawfully acquired VDAs are ordinary property, though they may be attached as equivalent value in appropriate cases.
Is crypto legal in India?
It is not banned. The Supreme Court set aside the RBI's 2018 banking restriction in 2020, and VDA income is taxed, but crypto is not legal tender and there is no specific regulating statute.
Can the ED attach crypto assets?
Yes. VDAs are property under Section 2(1)(v), and wallets and exchange balances may be attached or frozen.