EU’s Markets in Crypto Assets (MiCA)

In News

• The European Parliament recently approved the cryptocurrency regulation “Markets in Crypto Assets (MiCA)”.

More about the new rules

• MiCA will impose compliance on the issuers of crypto assets, 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 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.
• Authorisation & CASPs:
  • 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. 
• Supervision of CASPs:
  • 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. 
• Responsibility of CASPs:
  • CASPs will have to demonstrate their stability and soundness, ability to keep the funds users safe, implementation of controls to ensure they are not engaging in proprietary trading; avoidance of conflicts of interest, and their ability to defend against market abuse and manipulation.

MiCA regulations

• Cryptoassets:
  • The MiCA legislation will apply to ‘cryptoassets’, which are broadly defined in the text as follows:
    • “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:
  • 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. 
  • MiCA will establish new rules for three types of stablecoins — 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.

Exemptions

• Transferable securities:
  • 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 crypto assets that already qualify as financial instruments under existing regulation. 
• Non Fungible tokens (NFTs):
  • It will also, for the most part, exclude non fungible tokens (NFTs). 
• Central bank digital currencies & digital assets:
  • 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.

Significance of MiCA

• Harmonising crypto industry:
  • According to Chainalysis, 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. 
• Protection against deception and fraud:
  • 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.
  • As investments and the size of the crypto industry grow, European and other regulators have felt the need to bring governance practices in crypto firms to ensure stability and financial sector-like rout and contagion. 

Criticisms

• Some experts feel that the regulation is already laggard in covering newer vulnerabilities in the crypto industry. 
  • For instance, it does not cover practices like crypto staking and 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 decentralised finance, which is prone to hacks and fraud because it’s managed by code rather than humans.

Indian Government’s stand on Cryptocurrency & way ahead

• The Reserve Bank of India (RBI), has long recommended a complete ban on all crypto, warning that it has the potential to destabilize the country’s monetary and fiscal stability.
• Despite having no regulatory framework for crypto, the Indian government had introduced a new tax regime last year, taxing crypto income at 30% and a 1% tax deducted at source (TDS) on crypto transactions.
• The government has recently placed all transactions involving virtual digital assets under the purview of the Prevention of Money Laundering Act (PMLA).
• India is now 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.

Source: TH