From UPSC perspective, the following things are important :
Prelims level : MICA, Stablecoins
Mains level : Read the attached story
The Markets in Crypto-Assets (MiCA) law of European Parliament is the first comprehensive regulation for cryptos, and some expect it to become a trendsetter for crypto regulation globally.
What is MiCA Legislation?
- The MiCA law seeks to address concerns like money-laundering, protection of consumers and investors, accountability of crypto firms, stablecoins and the environmental footprint of crypto mining.
- It would regulate the “wild west” of crypto assets and provide legal certainty for those issuing crypto assets, while ensuring high standards for investors and consumers.
- It also excludes non-fungible tokens, but the EU may make a horizontal legislation for NFTs in 18 months, after a separate assessment.
How will MiCA regulate stablecoins?
- The efficacy of stablecoins, which claim to be less volatile that other cryptos, came into question after the crash of some crypto-currencies.
- The MiCA would mandate that stablecoin issuers maintain minimum liquidity to provide for sudden large withdrawals by users, and the reserves must also be protected from insolvency.
- The European Banking Authority (EBA) has been brought in to supervise stablecoins, and the law asks stablecoin issuers to provide claims to investors free of charge.
- In addition, large coins which are used as a means of payment will be capped at €200 million worth of transactions per day.
How will the new law regulate money laundering?
- MiCA requires the EBA to maintain a public register of non-compliant crypto asset service providers (CASPs).
- Additional checks will be required, in line with the EU Anti-Money-Laundering (AML) framework.
How does it address green concerns?
- Under MiCA, crypto companies will be required to declare their environmental and climate footprint.
- The European Securities and Markets Authority will develop regulatory technical standards on methodologies, content and presentation of such information.
- The EC will also have to provide a report on the impact of crypto assets on environment.
- It would introduce mandatory minimum sustainability standards for mining mechanisms, especially the proof-of-work system which raises overall computing power.
Will it affect Indian regulations?
- India’s crypto regulations seem to have taken a back seat at the moment.
- Industry executives and experts say the government and industry are more concerned about taxation.
- India levied a 30% tax on income from transfer of cryptos from April, and added a 1% tax deduction at source from 1 July.
- This, along with the overall bear market, has depressed trading volumes, and revenues of crypto exchanges.
- Indian regulators are also expected to consider rules being developed in the US before taking concrete decisions.
- Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals).
- Advantages of asset-backed cryptocurrencies are that coins are stabilized by assets that fluctuate outside of the cryptocurrency space, that is, the underlying asset is not correlated, reducing financial risk.
- Bitcoin and altcoins are highly correlated, so that cryptocurrency holders cannot escape widespread price falls without exiting the market or taking refuge in asset backed stablecoins.
- Furthermore, such coins, assuming they are managed in good faith, and have a mechanism for redeeming the asset(s) backing them, are unlikely to drop below the value of the underlying physical asset, due to arbitrage.