CONTEXT OF THE NEWS
The Financial Intelligence Unit – India (FIU-IND) has issued new AML–KYC guidelines for Virtual Digital Asset (VDA) service providers.
The move aims to curb money laundering, terror financing, and tax evasion in India’s growing cryptocurrency ecosystem.
BACKGROUND
India has witnessed rapid growth in cryptocurrency usage without a full-fledged regulatory framework.
The issue links to GS Paper III (Internal Security, Money Laundering, Financial Regulation) and Prelims (Economy, Digital Assets, PMLA).
NEWS BREAKDOWN
WHAT ARE VIRTUAL DIGITAL ASSETS (VDAs)?
Virtual Digital Assets (VDAs) are digitally represented values created using cryptographic technology.
Legal Definition
- Defined under Section 2(47A) of the Income Tax Act, 1961
- Inserted by the Finance Act, 2022
- Excludes Indian and foreign currency
Types of VDAs
- Cryptocurrencies – Bitcoin, Ethereum
- Non-Fungible Tokens (NFTs) – unique digital assets
- Utility Tokens – access to services
- Asset/Security Tokens – linked to real-world assets
WHY WERE NEW GUIDELINES NEEDED?
Earlier systems had:
- Weak identity verification
- High anonymity
- Risk of illicit fund flows
FIU-IND aims to:
- Improve traceability
- Strengthen financial integrity
- Align with global AML standards
KEY FIU-IND GUIDELINES FOR VDAs
1. Enhanced User Verification
Mandatory during onboarding:
- Live selfie with liveliness detection
- Eye blink or head movement
- Geo-location tracking
- Latitude, longitude, timestamp, IP address
- Prevents deepfake and static image fraud
2. Multi-Layer KYC System
Requires:
- PAN + one government ID
- Aadhaar / Passport / Voter ID
- OTP verification
- Mobile and email
- Penny-drop verification
- ₹1 bank transaction to confirm account
3. Risk-Based Monitoring
KYC update frequency:
- High-risk users → Every 6 months
- Others → Annually
Enhanced due diligence for:
- Tax haven-linked entities
- FATF grey/black list countries
- Politically Exposed Persons (PEPs)
- Non-Profit Organisations (NPOs)
4. Crackdown on Opaque Crypto Instruments
- ICOs and ITOs strongly discouraged
- Crypto tumblers and mixers prohibited
Definition – Crypto Tumblers/Mixers
- Services that pool and scramble crypto funds
- Break traceability on public blockchain ledgers
5. Regulatory Compliance Obligations
Crypto exchanges must:
- Register as PMLA reporting entities
- Maintain 5-year transaction and client records
- Report Suspicious Transaction Reports (STRs) to FIU-IND
Definition – Cryptocurrency Exchange
A digital platform enabling buying, selling, and trading of cryptocurrencies.
Example: Coinbase
REGULATORY AND TAXATION FRAMEWORK IN INDIA
Taxation Rules
- 30% flat tax on VDA income
- Effective from 1 April 2022
- No deductions except cost of acquisition
- Losses cannot be set off or carried forward
- 1% TDS under Section 194S
Anti-Money Laundering Oversight
- VDAs covered under Prevention of Money Laundering Act (PMLA) since March 2023
- Exchanges and wallet providers are reporting entities
ABOUT FIU–IND
- India’s central financial intelligence agency
- Functions under Department of Revenue, Ministry of Finance
- Reports to the Economic Intelligence Council
- Single-point regulator for crypto exchanges under PMLA
- Crypto is taxable but not legal tender in India
PRELIMS FOCUS
- VDA definition: Section 2(47A), Income Tax Act
- Flat crypto tax: 30%
- TDS on VDAs: 1%
- AML coverage of crypto: Since March 2023
- FIU-IND under: Ministry of Finance
- Crypto status: Taxable, not legal tender
CONCLUSION / WAY FORWARD
Robust AML norms can balance innovation with security by ensuring transparency, protecting investors, and aligning India’s crypto ecosystem with global financial standards.
PRELIMS CHECK
Q1. With reference to Virtual Digital Assets (VDAs) in India, consider the following statements:
- VDAs are legally defined under the Income Tax Act, 1961.
- Income from VDAs is taxed at slab rates.
- Losses from VDAs can be carried forward.
Which of the statements given above is/are correct?
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3
Q2. Consider the following features:
- Live selfie verification
- Geo-location tracking
- Prohibition of crypto mixers
These features are associated with guidelines issued by:
(a) RBI
(b) SEBI
(c) FIU-IND
(d) CBDT
Q3. With reference to crypto regulation in India, consider the following statements:
- Cryptocurrency exchanges are reporting entities under PMLA.
- Crypto is legal tender in India.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
ANSWERS WITH EXPLANATION
Q1 – (a)
- VDAs are defined under Section 2(47A)
- Flat 30% tax, not slab-based
- Losses cannot be carried forward
Q2 – (c)
- Guidelines issued by FIU-IND
- Focus on AML and traceability
- Target crypto misuse
Q3 – (a)
- Exchanges are PMLA reporting entities
- Crypto is not legal tender
“Effective regulation does not stop innovation; it gives innovation a stable future.”
