CRYPTOCURRENCY REGULATIONS

CRYPTOCURRENCY REGULATIONS

WHY IN NEWS ?

• The European Parliament, the legislative body of the 27-country block European Union, has approved the world’s first set of comprehensive rules vis-a-vis cryptocurrency regulation.
• The rules aims 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.

ABOUT NEW RULES

• MiCA will impose compliance on the issuers of cryptoassets, who are defined as the “legal person who offers to the public any type of crypto assets”.

• It will apply to crypto asset service providers (CASPs) providing one or more of these services —
• the operation of a trading platform like CoinBase Custody and administration of crypto-­assets on behalf of third parties (customers).
• The exchange of crypto ­assets for funds/other crypto­assets,
• The execution of orders for crypto­-assets
• The placing of crypto­-assets
• Providing transfer services for crypto ­assets to third parties,
• Providing advice on cryptoassets and crypto ­portfolio management.
• The regulation prescribes different sets of requirements for CASPs depending on the type of crypto-assets.
• The base regime will require every CASP to get incorporated as a legal entity in the EU.
• They can get authorised in any one member country and will be allowed to conduct their services across the 27 countries.
• Another legislation passed with MiCA requires crypto companies to send information of senders and recipients of crypto assets to their local anti­-money laundering authority.
• This exercise aims to prevent laundering and terror financing activities.

ASSETS COVERED UNDER MiCA RULES

• The MiCA legislation will apply to ‘crypto-assets’, which are broadly defined in the text as “a digital representation of a value or a right that uses cryptography for security and is in the form of a coin or a token or any other digital medium which may be transferred and stored electronically, using distributed ledger technology or similar technology”.
• This definition implies that it will apply not only to traditional cryptocurrencies like Bitcoin and Ethereum but also to newer ones like stablecoins.
• As for the assets that will be out of MiCA’s scope, it will not regulate digital assets that would qualify as transferable securities and function like shares or their equivalent and other cryptoassets that already qualify as financial instruments under existing regulation.
• It will also for the most part, exclude nonfungible tokens (NFTs).
• MiCA will also not regulate central bank digital currencies issued by the European Central Bank and digital assets issued by national central banks of EU member countries when acting in their capacity as monetary authorities, along with crypto assets­ related services offered by them.

WHY THE NEED OF REGULATION ?

• Having a comprehensive framework like MiCA for 27 countries in Europe not only harmonises the crypto industry but also gives the EU a competitive edge in its growth compared to the U.S. or the U.K. which lack regulatory clarity.
• More importantly, 2022 saw some of the biggest failures and wipeouts in the crypto industry.
• Fallouts includes bankruptcies and fraud scandals, be it the collapse of the crypto exchange FTX and its spat with Binance or the failure of Terra LUNA cryptocurrency and its associated stablecoin.

• The liquidity shortage caused by these shocks led other crypto lending platforms to halt customer transfers and withdrawals before filing for bankruptcy.

CRYPTO CURRENCY REGULATION IN INDIA

• India is yet to have a comprehensive regulatory framework for cryptoassets.
• A draft legislation on the same is reportedly in the works.
• A full-­fledged regulation aside, the Indian government has taken certain steps to bring cryptocurrencies under the ambit of specific authorities and taxation.
• In the Union Budget for 2022, the Finance Ministry said that cryptocurrency trading in India has seen a “phenomenal increase” and imposed a 30% tax on income from the “transfer of any virtual digital asset.”
• In March this year, the government placed all transactions involving virtual digital assets under the purview of the Prevention of Money Laundering Act (PMLA).

WAY FORWARD

• This proposal by EU is radical and proactive in its scope and clearly shows that the EU wants to tackle the fundamental regulatory obstacles posed by the decentralised nature of the networks by integrating distributed ledger technologies (DLT) into the existing EU legal framework.
• It is therefore very welcome that the debate on cryptos has now moved from its niche to the highest political levels.
• It is to be expected that institutional investors and partners will also increasingly open up to the crypto sector.

SYLLABUS: MAINS, GS-3, ECONOMY

SOURCE: THE HINDU