EU New Crypto-Legislation

Context:

The European Parliament, the legislative body of the 27-country block European Union, has approved the world’s first set of comprehensive rules to bring largely unregulated cryptocurrency markets under the ambit of regulation by government authorities. The regulation, called the Markets in Crypto Assets (MiCA), will come into force after formal approval by member states.

Relevance:

GS II: International Relations

Dimensions of the Article:

1. Importance of Regulation in the Crypto Industry
2. What kind of assets will MiCA cover?
3. New rules that will be imposed by MiCA
4. Regulation of Cryptocurrencies in India

Importance of Regulation in the Crypto Industry

• Harmonization: Comprehensive frameworks like MiCA (Markets in Crypto-Assets) for 27 countries in Europe provide regulatory clarity and harmonization, which can help to create a level playing field for the crypto industry across different countries and regions.
• Competitive edge: Regulation can give the EU a competitive edge in the crypto industry and support its growth compared to countries like the U.S. or the U.K., which lack regulatory clarity and consistency.
• Prevention of failures and fraud: Proper regulation can help to prevent some of the biggest failures and fraud scandals in the crypto industry, which have caused liquidity shortages and bankruptcies in recent years.
• Consumer protection: Regulations can help to protect consumers from fraudulent or risky investments and provide a safer and more secure environment for crypto transactions and investments.
• Increased investor confidence: Clear and consistent regulations can increase investor confidence in the crypto industry and attract more traditional investors, leading to more mainstream adoption and growth.

What kind of assets will MiCA cover?

• MiCA legislation will cover “cryptoassets,” which are defined as digital representations of value or rights that use cryptography for security and can be transferred and stored electronically using distributed ledger technology or similar technology.
• This definition includes traditional cryptocurrencies like Bitcoin and newer ones like stablecoins.
• MiCA will not regulate digital assets that qualify as transferable securities or financial instruments under existing regulation, as well as most non-fungible tokens (NFTs).
• It will also not regulate central bank digital currencies issued by the European Central Bank or digital assets issued by national central banks of EU member countries in their capacity as monetary authorities, or cryptoasset-related services offered by them.

New rules that will be imposed by MiCA:

• MiCA will require compliance from issuers of cryptoassets and cryptoasset service providers (CASPs) that offer crypto-related services to the public.
• The regulation will apply to CASPs that provide services like operating a trading platform, custody and administration of crypto-assets on behalf of third parties, exchanging crypto-assets for funds/other crypto-assets, executing orders for crypto-assets, placing crypto-assets, providing transfer services for crypto-assets to third parties, providing advice on cryptoassets, and crypto-portfolio management.
• CASPs will be required to get incorporated as a legal entity in the EU and will have to be authorised by regulators in any one member country. They will be supervised by regulators like the European Banking Authority and the European Securities and Markets Authority, who will ensure that the companies have the required risk management and corporate governance practices in place.
• CASPs of stablecoins will have to furnish key information in the form of a white paper mentioning details of the crypto product, the terms of the offer to the public, the type of blockchain verification mechanism they use, the rights attached to the cryptoassets in question, the key risks involved for the investors and a summary to help potential purchasers make an informed decision regarding their investment.
• Crypto companies will also have to send information of senders and recipients of cryptoassets to their local anti-money laundering authority to prevent laundering and terror financing activities.

Regulation of Cryptocurrencies in India:

• India does not have a comprehensive regulatory framework for cryptoassets yet
• A draft legislation on crypto regulation is reportedly in the works
• The Indian government has taken steps to bring cryptocurrencies under specific authorities and taxation
• The Union Budget for 2022 imposed a 30% tax on income from the transfer of any virtual digital asset
• In March 2023, the government placed all transactions involving virtual digital assets under the purview of the Prevention of Money Laundering Act (PMLA)

-Source: The Hindu