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Virtual Digital Asset Service Providers (VDA SPs)

Facts for Prelims (FFP)


Source: TH

 Context: The Financial Intelligence Unit India (FIU IND) issued show-cause notices to 9 offshore virtual digital asset service providers (VDA SPs), including Binance and Huobi, for operating illegally without complying with anti-money laundering regulations (under the Prevention of Money Laundering Act (PMLA), 2002)


What are VDA SPs?

VDA SPs (Virtual Digital Asset Service Providers) are entities (operating within or outside India) that offer digital asset services, such as cryptocurrency exchanges.


Regulations in place for VDA SPs:

In March 2023, India mandated VDA SPs to adhere to the Prevention of Money Laundering Act under the Anti Anti-Money Laundering/Counter Financing of Terrorism (AML-CFT) framework. They also have to verify client identities and record financial transactions. Non-compliance led to notices and a request to block URLs. They are required to be registered with FIU IND as Reporting Entity. Currently, 31 VDA SPs have registered with FIU IND


Concerns of Money Laundering Due to VDAs:

  1. Predicate crime: Raising funds through illegal activities by selling illegal goods or services in return for virtual assets.
  2. Placement: Converting ill-gotten virtual assets into fiat currencies within a traditional financial system.
  3. Layering: Converting fiat assets into virtual assets, exchanging virtual assets, and vice-versa.
  4. Integration: Forming an online company that accepts crypto payments to legitimize income and clean dirty crypto.
  5. Hiding: Using anonymizing services like mixers and tumblers to break the links between crypto transactions.


Global Regulations:

Global regulations vary, with Dubai’s VARA having a licensing framework, the EU’s MiCA focusing on market rules, and the U.S. lacking a comprehensive framework. The Bureau for International Settlements (BIS) suggests considering an outright ban, containment, or regulation, emphasizing the need to balance benefits and costs, especially for emerging market economies.


About Financial Intelligence Unit – India

It is an organisation (HQ: New Delhi; formed: 2004) under the Department of Revenue, Government of India which collects financial intelligence about offences under the Prevention of Money Laundering Act, 2002. It is an independent body reporting directly to the Economic Intelligence Council (EIC) headed by Finance Minister.