EU’s New Crypto-Legislation

26-08-2023

12:26 PM

1 min read

Mains GS-III: Economy

What’s in today’s article?

Why in news?
Stablecoins
What are stablecoins?
What keeps the prices stable?
News Summary: EU’s new crypto-legislation
What are cryptocurrencies?
Why regulation was need for Crypto Assets?
What kind of assets will MiCA cover?
Criticism of MiCA
How is crypto regulated in India?

Why in news?

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.
- European Parliament is the legislative body of the 27-country block European Union.
The regulation, called the Markets in Crypto Assets (MiCA), will come into force after formal approval by member states.

Stablecoins

What are stablecoins?

Stablecoins are cryptocurrencies without the volatility. Unlike cryptocurrencies, these coins are generally pegged to a govt currency.
They share a lot of the same powers as other cryptos, but their value is steady, more like a traditional currency, i.e., the US Dollar, Indian Rupee, etc.
There are many stablecoins such as Tether, USD Coin, Binance USD, Dai etc.

What keeps the prices stable?

These digital currencies are generally pegged to a government currency like the dollar or euro, by relying on stable financial backing like bank reserves and short-term debt.
- To promise holders that every $1 they put in will remain worth $1, stablecoins hold a bundle of assets in reserve.
This reserve usually consists of short-term securities such as cash, government debt or commercial paper.
There are two types of stablecoins depending on the collateral:
- national currency backed, and
- cryptocurrency backed.

News Summary: EU’s new crypto-legislation

What are cryptocurrencies?

Cryptocurrencies are digital or virtual currencies in which encryption techniques are used to regulate the generation of their units and verify the transfer of funds.
These currencies operate independently of a central bank.

Why regulation was need for Crypto Assets?

To harmonises the crypto industry
- As per a report, about 22% of the global crypto industry was concentrated in central, northern and western Europe.
- These industries received $1.3 trillion worth of crypto-assets.
- Having a comprehensive framework like MiCA for 27 countries in Europe will harmonise the crypto industry.
Competitive edge to EU
- This regulation will give the EU a competitive edge in its growth compared to the U.S. or the U.K. which lack regulatory clarity.
To regulate the crypto industry
- 2022 saw some of the biggest failures and wipeouts in the crypto industry involving bankruptcies and fraud scandals.
  - E.g. - Collapse of the crypto exchange FTX and its spat with Binance; the failure of Terra LUNA cryptocurrency.
- The liquidity shortage caused by these shocks led other crypto lending platforms to halt customer transfers and withdrawals before filing for bankruptcy.
- Hence, European and other regulators have felt the need to bring governance practices in crypto firms to ensure stability.

What kind of assets will MiCA cover?

The MiCA legislation will apply to ‘cryptoassets’, which have broadly been defined in the text.
As per this text, the regulation 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 — a fiat currency like the U.S. dollar or other stable cryptocurrencies.
It will, however, 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.
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.
It will also for the most part, exclude nonfungible tokens (NFTs).
- NFTs are digital assets that represent ownership of a unique item or piece of content, such as artwork, music, videos, virtual real estate, or other types of digital creations.

Criticism of MiCA

MiCA does not cover practices like crypto staking and lending, which led to some of the industry’s biggest failures last year.
- Crypto staking is a process where cryptocurrency holders can lock up their funds in a blockchain network in order to participate in the transaction validation process and earn rewards.
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.

How is crypto regulated in India?

India is yet to have a comprehensive regulatory framework for cryptoassets. A draft legislation on the same is reportedly in the works.
In the Union Budget for 2022, the Finance Ministry imposed a 30% tax on income from the “transfer of any virtual digital asset.”
In March 2023, the government 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.

Q1) What are nonfungible tokens (NFTs)?

Non-fungible tokens (NFTs) are digital assets that are unique and cannot be exchanged for another identical item, unlike traditional cryptocurrencies such as Bitcoin or Ether, which are fungible and can be exchanged for another identical token of the same value.

Q2) What is Tether?

Tether is a cryptocurrency that is designed to be a stablecoin, which means its value is pegged to the value of a more stable asset, such as the US dollar. Specifically, Tether is pegged to the value of the US dollar in a 1:1 ratio, meaning that each Tether token is meant to be equivalent in value to one US dollar.

Source: Explained | What is the EU’s new crypto-legislation? | Techlive | Investopedia