Guidelines for Virtual Digital Assets

Mandatory Live Selfie with liveliness detection (eye‑blink/head movement) and geo‑tracking (latitude, longitude, timestamp, IP) during onboarding.
Multi‑Layer KYC: PAN + secondary ID (Aadhaar/Passport/Voter ID), OTP verification for email/mobile, and a Rs 1 ‘penny‑drop’ bank transaction.
Risk‑Based Monitoring: KYC updates every 6 months for high‑risk clients, annually for others; enhanced due diligence for entities linked to tax havens, FATF grey/black lists, PEPs, or NPOs.
Prohibited Activities: ICOs, ITOs, and crypto tumblers/mixers that enhance anonymity.
Reporting Requirements: Crypto exchanges must register as PMLA reporting entities, retain 5‑year client/transaction records, and report suspicious transactions to FIU‑IND.
Taxation: 30 % flat tax on VDA transfers (effective 1 Apr 2022); 1 % TDS under Sec 194S.
Legal Definition: VDAs defined under Sec 2(47A) of the Income Tax Act, 1961 (Finance Act 2022) – includes cryptocurrencies, NFTs, utility tokens, and security tokens.

Virtual Digital Assets (VDAs) are digitally represented values using cryptographic technology. Their rapid growth prompted the Indian government to formalise definitions and tax regimes.
FIU‑IND operates under the Ministry of Finance, derives powers from the Prevention of Money‑Laundering Act, 2002 (PMLA), and reports to the Economic Intelligence Council chaired by the Finance Minister.
Since March 2023, VDA activities fall under PMLA, making exchanges and wallet providers reporting entities.

Financial Integrity: Tight KYC and AML measures aim to prevent money‑laundering, terrorist financing, and illicit fund flows through crypto.
Revenue Generation: Clear tax provisions ensure fiscal capture from a high‑growth sector.
Investor Protection: Discouraging ICOs/ITOs and tumblers protects retail investors from fraud and pump‑and‑dump schemes.
Internal Security: Monitoring crypto transactions helps track funding of extremist activities, aligning with national security objectives.

Prevention of Money‑Laundering Act, 2002 (PMLA) – empowers FIU‑IND to enforce AML norms on VDAs.
Income Tax Act, 1961 – Sec 2(47A) defines VDAs; Sec 194S mandates TDS on specified crypto transactions.
Finance Act, 2022 – introduced the statutory definition of VDAs and the 30 % tax rate.
FATF Recommendations – India’s alignment with FATF grey/black‑list guidelines influences the risk‑based monitoring framework.

Factual recall of new KYC requirements and tax rates (Prelims).
Analytical discussion on the impact of stringent AML norms on crypto adoption, innovation, and illicit financing (Mains).
Comparative analysis with regulatory approaches of other jurisdictions.

Previous Year Questions (PYQ)