EU’s new crypto-legislation

(MainsGS2:Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.)

Context:

• Recently, the European Parliament 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.

Need of regulation:

• About 22% of the global crypto industry was concentrated in central, northern, and western Europe, which received $1.3 trillion worth of crypto assets. 
• 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.

Assets that 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.
• Stablecoins are digital tokens that aim to stay pegged in value with a more stable asset i.e. a fiat currency like the U.S. dollar or other stable cryptocurrencies. 
• MiCA will establish new rules for three types of stablecoins like asset-referenced tokens, which are linked to multiple currencies, commodities, or cryptocurrencies, e-money Tokens, which are linked to a single currency and utility tokens, which are intended to provide access to a good or service that will be supplied by the issuer of that token.
• MiCA will not regulate nonfungible tokens (NFTs), 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.

Crypto regulation in India:

• India is yet to have a comprehensive regulatory framework for crypto assets. 
• 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).

Conclusion:

• India is calling for consensus in the G20 grouping, where it currently holds the presidency, to have a globally coordinated policy response on crypto assets that takes into consideration the full range of risks, including those specific to emerging markets and developing economies.