The Ministry of Finance has issued a notification dated March 07, 2023 (“Notification”), classifying entities that engage in specific activities (see below) related to Virtual Digital Assets (“VDA(s)”) in the course of business, as “persons carrying on designated business or profession” Therefore, such entities are now considered “Reporting Entities” under the Prevention of Money Laundering Act, 2002 and the corresponding rules (“PMLA”).
VDAs are defined as any “information or code or number or token” that is not currency and is generated through “cryptographic means or otherwise”. The definition further specifies that VDAs offer a digital representation of value exchanged, inherent value, or serve as a store of value or a unit of account that can be transferred, stored or traded electronically, and includes notified non-fungible tokens (“NFTs”) or other digital assets[1].
The definition of NFTs includes all tokens that qualify as a VDA, excluding those which enable the transfer of ownership in underlying tangible assets in a legally enforceable manner[2]. The fact that subsequent clarifications have had to be issued to exclude items like subscriptions, gift cards and reward points[3] indicates the broad scope of this definition .
Under the notification Notification, carrying out (or enabling) the following activities would result in classification as a Reporting Entity:
(a) exchange between VDAs and fiat currencies;
(b) exchange between one or more forms of VDAs;
(c) transfers of VDAs;
(d) safekeeping or administration of VDAs or instruments enabling control over VDAs; or
(e) participation in and provision of financial services related to an issuer’s offer and sale of VDA.
(collectively “Regulated Activities”).
Reporting Entities under the PMLA are subject to an onerous and granular set of obligations, including verification of client identity[4] & ownership of the client[5] and purposes behind transactions[6]& record maintenance[7].
While financial institutions and casinos have long been subject to this regime, the Notification may result in an expansion to certain activities carried out by online real money gaming intermediaries[8].
In games, in-game tokens often have value attached to them and can be transferred, stored or sometimes traded. This can be a key mechanism for most games.
Similarly, in-game objects, like collectibles, skins and the like, are often generated either with or without blockchain-based validation. These objects (of value) can be capable of being stored or traded electronically. While they are primarily intended to improve the gaming experience and engagement, potential classification of such assets as VDAs on grounds of having inherent value (example, as tradeable artistic works or instruments of value) can have PMLA implications for gaming companies. Given that players may exchange, craft, improve, or consume in-game objects in the course of gameplay, satisfying reporting obligations in such circumstances may require creating additional technology and infrastructure.
It may be noted that the purchase of in-game tokens is typically enabled through one or more financial intermediaries such as payment gateways or wallet providers, which are already Reporting entities under the PMLA. Thus, the characterisation of an online gaming entity as a “Reporting Entity” is not required. Further, the CERT-In Directions, dated April 28, 2022 (“CERT-In Directions”), already require virtual asset service providers, virtual asset exchange providers and custodian wallet providers to retain transaction and KYC records for a period of 5 (five) years. There are also the KYC requirements proposed under the draft amendment to the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 (“Gaming Amendments”).
Given that the Notification is now in force, gaming intermediaries should take note of these changes in the law and evaluate their offerings from a PMLA perspective.
[1] Section 2 (c) (47-A) of the Finance Act, 2022.
[2] Ministry of Finance, Central Board of Direct Taxes, Notification, S.O. 2959(E). (June 30, 2022).
[3] Ministry of Finance, Central Board of Direct Taxes, Notification, S.O. 2958(E). (June 30, 2022).
[4] Section 11-A of the PMLA.
[5] Section-12-AA (b) of the PMLA.
[6] Section 12-AA (c) of the PMLA.
[7] Section 12 of the PMLA.
[8] Rule 2(1)(qa) and Rule 2(1)(qb) of the Draft amendments to the IT (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 in relation to online gaming, Ministry of Electronics and Information Technology, Government of India respectively define an “online game” to mean a game that is offered on the Internet and is accessible by a ser through a computer resource if he makes a deposit with the expectation of earning winnings; andan “online gaming intermediary” to mean an intermediary that offers one or more than one online game.
For further information, please contact:
Arun Prabhu, Partner, Cyril Amarchand Mangaldas
arun.prabhu@cyrilshroff.com
