Money laundering: RBI should play pivotal role in framing global crypto regulations

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The cryptocurrency game has just been hotting up in India and already the flag has been raised for a possible foul. The Enforcement Directorate has issued a show-cause notice last week to leading Indian crypto player, WazirX, and its directors, under the Foreign Exchange Management Act, 1999 (FEMA) for violation of the provisions of the law.

Money laundering

The ED has alleged that certain Chinese nationals had laundered money by converting rupee deposits into cryptocurrency Tether (USDT) and then transferring the amount to Binance wallets (an exchange registered in Cayman Islands) based on instructions received from outside India.

The agency has also alleged that WazirX does not collect the requisite documents from its clients in violation of norms relating to Anti Money Laundering (AML) and Combating of Financing of Terrorism (CFT) precaution and FEMA guidelines.

At this stage, the presumption of innocence will lie in favour of WarizX. WazirX would certainly defend itself and counter the charges forcefully.

However, the ED’s notice clearly shows that the Indian regulators and agencies are closely watching the developments in the crypto market in India. Transactions that are dubious, or those that appear to be unlawful or against the interest of the country, will not be allowed to be undertaken escaping their radar.

Terror funding

There are fears and concerns globally among governments and regulators of the possibility of the crypto market being open to misuse by miscreants, money launderers and for terror funding. In this regard, the role of crypto platforms that facilitate trading is crucial and will be under intense scrutiny at all times.

On their part, the trading platforms or exchanges need to take all possible precautions not to breach any legal requirements or unknowingly being used for dubious transactions. Falling foul of the law would involve reputational issues and may threaten the viability of their businesses in the long run.

Financial trading platforms, be it in crypto or otherwise, have a fiduciary responsibility towards their entire clientele who repose their trust on them and invest their money through them hoping to make gains leading to a better life. However, should their business be impacted or halted by governmental or regulatory action due to weak compliance of laws, or pure oversight, it could lead to huge losses to many who have reposed their faith in them.

Rising popularity

Concerns over the rising popularity of the crypto market, and its fallout on the financial system is a global phenomenon. In fact, a June 10, 2021 report by the Basel Committee on Banking Supervision (BCBS) on prudential norms for crypto assets, which proposed a huge 1,250% risk weight on maximum long and short positions banks exposed to crypto, has underscored the fears.  “The growth of crypto assets and related services has the potential to raise financial stability concerns and increase risks faced by banks. The capital will be sufficient to absorb a full write-off of the cryptoasset exposures without exposing depositors and other senior creditors of the banks to a loss,” the report said.

The Reserve Bank of India, which has been keeping a watch too on the crypto market, and the Indian government, should be in the forefront in the global efforts to bring in proper regulations for trading in the digital currencies.

Cryptocurrency is here to stay and is witnessing exponential growth. The earlier the regulators get together to bring in global norms for domestic and cross-border activity, the better. While there is money to be made by the investing community, there is also the possibility of huge losses if the game is not played honestly.