Published on: April 27, 2023

The EU’s new crypto-legislation

The EU’s new crypto-legislation

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 to bring largely unregulated crypto currency 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.

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

What kind of assets will MiCA cover?

  • The MiCA legislation will apply to ‘cryptoassets’, 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.
  • 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 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 cryptoassets-related services offered by them.

What are the 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 cryptoassets”.
  • It will apply to cryptoasset 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 crypto-assets, 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.
  • They will then 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.
  • Besides authorisation, service providers of stablecoins also have to furnish key information in the form of a white paper mentioning the details of the crypto product and the main participants in the company, 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.
  • Another legislation passed with MiCA requires crypto companies to send information of senders and recipients of cryptoassets to their local anti-money laundering authority, to prevent laundering and terror financing activities.

How is crypto regulated in India?

  • India is yet to have a comprehensive regulatory framework for crypto assets. 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 crypto currencies under the ambit of specific authorities and taxation.
  • In the Union Budget for 2022, the Finance Ministry said that crypto currency 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).