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.
What is in the new legislation?
The regulation is called the Markets in Crypto Assets (MiCA). Mica is the most comprehensive regulatory framework for digital assets to date.
The rules will impose a number of requirements on crypto platforms, token issuers and traders around transparency, disclosure, authorization, and supervision of transactions.
Platforms will be required to inform consumers about the risks associated with their operations, while sales of new tokens will also come under regulation.
Coverage: The MiCA legislation will apply to ‘cryptoassets’ (Bitcoin, Ethereum and stablecoins)
Cryptoassets can be understood 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
Stablecoins: It will apply not only to traditional cryptocurrencies like Bitcoin and Ethereum but also to newer ones like stablecoins. MiCA will establish new rules for three types of stablecoins-
Stablecoins are digital tokens that aim to stay pegged in value with a more stable asset — a fiat currency like the U.S. dollar or other stable cryptocurrencies.
asset-referenced tokens, which are linked to multiple currencies, commodities or cryptocurrencies
e-money Tokens, which are linked to a single currency
utility tokens are intended to provide access to a good or service that will be supplied by the issuer of that token
Out of Coverage
MiCA’s scope 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.
What is the need of such regulation?
The concentration of the crypto industry: About 22% of the global crypto industry was concentrated in central, northern and western Europe, which received $1.3 trillion worth of cryptoassets.
Rise in size: The investments and the size of the crypto industry have grown at unprecedented rates.
Increasing Distability: The year 2022 saw some of the biggest failures and wipeouts in the crypto industry involving 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.
What are the benefits of such a framework?
Harmonising the industry: Having a comprehensive framework like MiCA for 27 countries in Europe would harmonise the crypto industry.
Competitive edge: It would also give the EU a competitive edge in its growth compared to the U.S. or the U.K. which lack regulatory clarity.
Stability: The governance practices in crypto firms would ensure stability and financial sector-like rout and contagion. The law would protect consumers against deception and fraud,
Regulation of cryptocurrency in India
India is yet to have a comprehensive regulatory framework for cryptoassets. Draft legislation on the same is reportedly in the works.
However, the Indian government has taken certain steps to bring cryptocurrencies under the ambit of specific authorities and taxation.
In Budget 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 2023, the government placed all transactions involving virtual digital assets under the purview of the Prevention of Money Laundering Act (PMLA).