Introduction

The central government has recently brought crypto exchanges, wallets & intermediaries under the purview of the Prevention of Money Laundering Act or PMLA 2002.

Any entity involved in the transfer, exchange, conversion, safekeeping, administration, or servicing of virtual digital assets will now be considered a “Reporting Entity” under the PMLA guidelines.

This means that crypto exchanges & other Virtual Asset Service Providers (VASPs) must adhere to certain ID verification, record-keeping, transaction monitoring, and reporting protocols.

Specifically, VASPs must implement workflows for digital KYC verification and report suspicious incidents to the FIU (Financial Intelligence Unit).

This is a major move in formalizing the crypto economy and bringing virtual assets further into the fold for trading, speculation & investment.

Tight anti-money laundering (AML) protocols will help prevent financial crime and illicit activities undertaken with virtual currencies and serve to bring in increased interest and investment in these assets.

PMLA For Virtual Digital Assets – Key Takeaways 

According to the central government’s notification in the extraordinary gazette, entities dealing with virtual assets will be reclassified as Reporting Entities. These will include crypto entities involved in the following:

  •  Exchange between virtual digital assets and fiat currencies
  • Exchange between one or more forms of virtual digital assets
  • Transfer of virtual digital assets
  • Safekeeping or administration of virtual digital assets or instruments enabling control over virtual digital assets
  • Participation in and provision of financial services related to an issuer’s offer and sale of a virtual digital asset.

As Reporting Entities, crypto exchanges and intermediaries will now have certain obligations as listed in PMLA, 2002. These include –

    • Obligation 1: Verification of Identity 

Crypto exchanges & intermediaries must put KYC verification procedures in place to verify users’ identities before onboarding. Verification may be completed using Aadhaar eKYC verification.

Reporting entities can also validate identities through verifying OVDs such as a passport.

Aadhaar is not compulsory for verification & it’s the user’s choice to opt for a verification mode that best suits them.

    • Obligation 2: Maintenance of Records

All reporting entities must maintain transaction records for every onboarded individual or entity. All such records are kept confidential and held for five years from the date of transactions and for five additional years after the end of any business relationship between VASP and the user.

    • Obligation 3: Furnishing Information & Fine Imposition 

The central government & RBI may prescribe procedures for furnishing transaction information. Additionally, regulators may impose fines on VASPs upon failing to perform any of these obligations or the additional conditions in PMLA, 2002.

Summing up – Crypto exchanges & intermediaries are now Reporting Entities and must comply with rules requiring them to conduct KYC verification & maintain records for all transactions as described in the recent notification.

Why Crypto Exchanges Need Strong KYC

With the Enforcement Directorate (ED) attaching Rs 936 crores worth of fraud to crypto exchanges, virtual assets are in dire need of some cleaning up.

Strong regulations are required to bring crypto into the formal economy and transform virtual assets into popular investment instruments. Implementing robust Customer Due Diligence (CDD) protocols such as ID verification & transaction monitoring will go a long way in mitigating money laundering and fraud in the crypto space.

Strong KYC verification enables several benefits for VASPs and individual crypto users:

  • Fraud Mitigation

Reduced money laundering, crypto fraud & stolen identities are the biggest advantages of implementing crypto KYC verification.

With APIs for ID fraud detection, AML crypto sanctions screening, PEP screening & adverse media scans, VASPs can prevent fraudsters from getting their foot in the door.

Additionally, leveraging video-based verification can help crypto exchanges further bolster AML protocols by enhancing liveness check quality.

  • Improved Reputation

KYC implementation shows a VASP’s commitment to AML/CTF and enhances business reputation among partners and users.  Compliance with KYC and AML regulations also strengthens the ease of doing business with crypto exchanges.

  • Better Client Relationships 

Creating a digital and seamless onboarding journey for first-time users has been shown to increase loyalty, satisfaction, and retention numbers. Crypto users are looking for a secure and smooth investment experience with exchanges, and creating robust KYC workflows is crucial in this respect.

  • Enhanced UX

End-to-end digital KYC verification also helps enhance the overall user experience in crypto trading and investing. ID verification & onboarding are among the first contact any user has with a business and first impressions matter.

With digital KYC, users are provided with a seamless and delightful journey that primes them for a virtual investment experience.

With AI-powered KYC verification, crypto exchanges and intermediaries can ensure compliance with the central government’s latest requirements while mitigating fraud, enhancing AML compliance, and providing users with a seamless digital experience.

Enable Fraud-Free Onboarding With SignDesk  

SignDesk is a global provider of document automation and ID verification solutions built to optimize process efficiency, ensure compliance, and boost governance.

We offer a globally compliant ID verification solution with video capabilities, geo-tagging, and lightweight APIs for everything from ID verification & business verification, to fraud detection and AML screening.

Our ID verification solution is easy to implement, can be integrated into any KYC or KYB workflow, and leverages cutting-edge AI & ML for ID matching, facial recognition, and liveness checks.

Users simply upload an ID and take a selfie holding their ID to complete KYC verification in seconds.

Talk to one of our solution consultants today to learn how our KYC solution has helped over a thousand businesses accelerate onboarding and secure ID verification!