The evolving world of technology has led to the emergence of cryptocurrencies as a novel form of asset class. Recently, the European Parliament approved the Markets in Crypto Assets (MiCA) regulation, marking an important milestone for the cryptocurrency industry. This legislation is the first comprehensive set of rules meant to regulate the largely uncontrolled cryptocurrency markets.
About MiCA and its Objectives
MiCA aims to establish governance practices in crypto firms to prevent potential financial crises that could adversely affect the broader economy. The regulation broadly covers different kinds of crypto assets and sets specific requirements for crypto asset service providers (CASPs) based on the type of crypto assets they deal with.
Assets Covered under MiCA
The MiCA regulation applies to digital representations of value or rights that are secured by cryptography. These include traditional cryptocurrencies like Bitcoin and Ethereum and newer ones like stablecoins. It also provides new rules for three types of stablecoins.
Assets Outside MiCA’s Scope
Not all digital assets fall within the purview of MiCA. Transferable securities that function like shares or their equivalents and other crypto assets considered as financial instruments under existing regulations are not regulated by MiCA. Similarly, it does not govern nonfungible tokens (NFTs) or central bank digital currencies issued by the European Central Bank and digital assets issued by national central banks of EU member countries.
New Rules under MiCA
Several new rules have been introduced under MiCA. For instance, CASPs must be incorporated as legal entities in the EU and demonstrate their stability, soundness, and capability to protect user funds. They should also be able to defend against market abuse and manipulation. Furthermore, stablecoin service providers must provide a white paper outlining key information about their crypto product and fulfill certain reserve requirements to avoid liquidity crises.
Anti-Money Laundering Measures for Crypto Companies
MiCA mandates crypto companies to send information about senders and recipients of crypto assets to their local anti-money laundering authority. This measure will help prevent money laundering and terror financing activities.
The Need for MiCA Legislation
With about 22% of the global crypto industry concentrated in central, northern, and western Europe, a comprehensive framework like MiCA offers the EU a competitive edge in its growth. The increasing investments and the size of the crypto industry has led policymakers worldwide to realize the need for good governance practices in crypto firms.
Impact on Consumers and the Crypto Industry
MiCA plays a crucial role in protecting consumers against deception and fraud, thereby enhancing their trust in the sector. It also enforces compliance among issuers of crypto-assets and CASPs.
India’s Approach Towards Cryptocurrency Regulation
While India is yet to have an all-inclusive regulatory framework for crypto assets, it has taken certain steps towards it. In 2017 and 2019, RBI issued warnings and made some aspects of cryptocurrency activity punishable. However, in 2020, the Supreme Court of India lifted the ban on cryptocurrency imposed by RBI. Although the government announced a 30% tax deduction on cryptocurrency transfers in its Union budget 2022-23, RBI recommended a ban on cryptocurrencies later in the year. Currently, India has launched its Central Bank Digital Currency (CBDC) or e-rupee and is exploring the potential use of blockchain technology.
Bringing Virtual Digital Assets Under PMLA
Following these developments, the Union Ministry of Finance recently announced that Virtual Digital Assets (VDA) or the Cryptocurrency have been brought under PMLA via a gazette notification.
The evolution of technologies like blockchain and the globalization of finance have contributed to the problem of money laundering. However, with regulations such as MiCA, there is hope for better governance in the crypto industry and a more systematic approach towards managing risks related to cryptocurrencies.