Explained | What is the new EU crypto legislation?

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The story so far: The European Parliament, the legislative body of the 27-nation European Union, has approved the world’s first set of comprehensive rules aimed at bringing the largely unregulated cryptocurrency markets under the control by government authorities. The regulation called Markets in Crypto Assets (MiCA) will come into force after formal approval by member states.

Why regulation?

According to Chainalysis, around 22% of the global crypto industry was concentrated in Central, Northern and Western Europe, which received $1.3 trillion in crypto assets. Having a comprehensive framework like MiCA for 27 countries in Europe not only harmonizes the crypto industry but also gives the EU a competitive advantage in its growth compared to the US or UK which lack regulatory clarity . More importantly, 2022 has seen some of the crypto industry’s biggest failures and wipeouts involving bankruptcies and fraud scandals, whether it’s the collapse of crypto exchange FTX and its spat with Binance or the failure of the Terra LUNA cryptocurrency and its associated stablecoin. The shortage of liquidity caused by these shocks led other crypto-lending platforms to suspend customer transfers and withdrawals before filing for bankruptcy.

As the investment and size of the crypto industry grows, regulators in Europe and elsewhere have felt the need to introduce governance practices in crypto businesses to ensure stability and the rout and contagion of the industry financial. Stefan Berger, Member of the European Parliament and responsible for the MiCA regulations, explained that the law will protect consumers against deception and fraud, and that the sector that was damaged by the collapse of the FTX can regain confidence.

What types of assets will the MiCA cover?

The MiCA legislation will apply to crypto-assets, which are broadly defined in the text as a digital representation of a value or right using cryptography for security purposes and in the form of a coin or token or any other transferable digital medium. 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.

Stablecoins are digital tokens that aim to stay pegged to value with a more stable asset, fiat currency like the US dollar or other stablecoins. The MiCA will establish new rules for three types of asset-referenced stablecoin tokens, which are tied to multiple currencies, commodities, or cryptocurrencies, e-money tokens, which are tied to a single currency, and utility tokens, which are intended to provide access to a good or service that will be provided by the issuer of this token.

As for assets that will be outside the scope of the MiCAs, they will not regulate digital assets that would qualify as securities and operate like stocks or their equivalent and other crypto assets that already qualify as financial instruments in under the regulations in force. It will also, for the most part, exclude non-fungible tokens (NFTs). The 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, as well as the services related to the crypto-assets they offer.

What are the new rules?

MiCA will impose compliance on issuers of crypto-assets, which are defined as the legal entity that offers any type of crypto-assets to the public. It will apply to Crypto-Asset Service Providers (CASP) 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 ( clients), exchanging crypto-assets for funds/other crypto-assets, executing crypto-asset orders, placing crypto-assets, providing crypto-asset transfer services to third parties, the provision of advice on crypto-assets and the management of crypto-currency portfolios.

The regulation prescribes different sets of requirements for PSAPs depending on the type of crypto-asset. The basic scheme will require each PSAP to be incorporated as a legal entity in the EU. They can obtain authorization in any member country and will be authorized to perform their services in all 27 countries. They will then be overseen by regulators such as the European Banking Authority and the European Securities and Markets Authority, who will ensure that companies have the required risk management and corporate governance practices in place. CASPs will need to demonstrate stability and soundness, ability to provide security to users of funds, implementation of controls to ensure they do not engage in proprietary transactions; avoid conflicts of interest and their ability to defend themselves against market abuse and manipulation.

Apart from the authorization, stablecoin service providers must also provide key information in the form of a white paper mentioning the details of the crypto product and the main participants of the company, the conditions of the public offer, the type of blockchain verification mechanism. they use, the rights attached to the crypto-assets in question, the main risks involved for investors and a summary to help potential buyers make an informed decision about their investment. Issuers of stablecoins will also be required to maintain sufficient reserves commensurate with their value to avoid liquidity crises. These stablecos pegged to currencies other than the Euro will have to cap their transactions at a daily volume of $200 million ($220 million) in a specified region.

Other legislation passed with the MiCA requires crypto companies to send information about senders and recipients of crypto assets to their local anti-money laundering authority, in order to prevent money laundering and terrorist financing activities.

What was the reaction?

The executives of some of the biggest cryptocurrency companies have objected to certain aspects of the MiCA, but the general opinion is that it is better to have a regulatory framework than to have no rules at all and to attract regulatory action on a case-by-case basis without clarity. .

Meanwhile, in the three years that MiCA has been in development, some experts believe that regulations are already slow to cover new vulnerabilities in the crypto industry. For example, it doesn’t cover practices like staking and crypto lending, which led to some of the industry’s biggest failures last year. A Bloomberg analysis notes that MiCA also does not cover NFTs or decentralized finance, which is prone to hacks and fraud because it is run by code rather than humans.

How is crypto regulated in India?

India does not yet have a comprehensive regulatory framework for crypto assets. A bill on the same subject is said to be in preparation.

Aside from full-fledged regulation, the Indian government has taken some steps to bring cryptocurrencies under the control of specific authorities and taxes. In the Union Budget for 2022, the Ministry of Finance declared that cryptocurrency trading in India had seen a phenomenal increase and imposed a 30% tax on income derived from the transfer of any virtual digital asset. In March this year, the government placed all transactions involving virtual digital assets under the Prevention of Money Laundering Act (PMLA).

However, statements from ministers and bureaucrats after the budget seem to suggest that the legality of cryptocurrencies in the country is still a gray area. India is now calling for a consensus within the G20 group, where it currently holds the presidency, to have a globally coordinated policy response on crypto assets that takes into consideration all risks, including those specific to emerging markets and developing economies.

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