Sri Lanka is moving to place cryptocurrency exchanges and digital asset custodians under a formal regulatory framework led by the Securities and Exchange Commission (SEC), as the country prepares for its third international assessment of safeguards against money laundering and terrorist financing. The initiative marks a significant policy shift, but its effectiveness will depend on whether new laws can close regulatory gaps without undermining legitimate digital investment.
The regulatory initiative comes as the Government seeks to establish clearer oversight of virtual assets and the businesses handling them. Draft legislation is being prepared following Cabinet approval on July 27 of a policy framework for regulating virtual assets and Virtual Asset Service Providers (VASPs), including cryptocurrency exchanges and custodial businesses.
Digital Economy Deputy Minister Eng. Eranga Weeraratne disclosed the progress at a meeting of the National Committee on Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and Countering Proliferation Financing (CPF), held at the Central Bank of Sri Lanka (CBSL) under Governor Dr. Nandalal Weerasinghe’s patronage.
Weeraratne chairs the committee’s VASP Regulatory Subcommittee, which is responsible for coordinating the development of the proposed regulatory arrangements.
Under the approved framework, the SEC will lead regulation, working alongside the CBSL, the Financial Intelligence Unit (FIU) and the Inland Revenue Department (IRD). However, the requirement to establish clear regulatory boundaries between the SEC and CBSL raises an important question: how effectively will responsibilities be divided when virtual asset businesses overlap with securities markets, financial services and payment systems?
The Digital Economy Ministry’s VASP concept paper was submitted to the Legal Draftsman’s Department on September 24. Work has begun on amending the SEC Act and preparing related legislation, while SEC officials have received training on virtual assets.
The initial regulatory phase will cover licensed exchanges and custodians. Virtual assets will not be recognised as legal tender and will be treated exclusively as investment assets. Their use for domestic payments will initially remain limited, with wider rules to be introduced as regulatory systems and institutional capacity develop.
This approach could provide an initial layer of protection against illicit financial flows, but implementation will be crucial. Licensing requirements alone cannot guarantee compliance unless regulators possess the technical expertise, investigative powers and information-sharing mechanisms necessary to identify suspicious transactions and enforce the law.
The proposed framework must also clarify how virtual asset holdings and gains will be reported for tax purposes, how customer assets will be protected, and what safeguards will prevent licensed operators from facilitating transactions linked to criminal proceeds.
Meanwhile, the Legal Draftsman’s Department and GovTech Sri Lanka plan to pilot artificial intelligence for drafting legislation, subject to human and legal review. Although the initiative could improve efficiency, the quality of legislation must remain the overriding priority.
The proposals will return to the Cabinet for consideration. Licensing procedures, anti-money laundering controls, reporting systems and staff training are also being developed.
With Sri Lanka preparing for its third Mutual Evaluation, the Government faces a test beyond passing legislation. Its credibility will depend on whether the new framework produces effective supervision, transparent enforcement and demonstrable protection against financial crime.