A turning point in crypto regulation, driven by Europe

If GDPR marks a watershed moment in consumer data protection, MiCA could point to responsible crypto governance

If GDPR marks a watershed moment in consumer data protection, MiCA could point to responsible crypto governance

There has been a lot of noise surrounding Finance Minister Nirmala Sitaraman’s response to a recent question in Parliament on the Indian government’s stance on cryptocurrencies. Some headlines have even gone so far as to suggest that there is a new plan to ban crypto in India.

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As I read it, all the finance minister’s response reveals is that if the Indian central bank wants a ban on cryptocurrencies, any legislation to “regulate or ban cryptocurrencies” can only be effective after significant international cooperation.

A flawless advantage

It is true. Cryptography is a natural Internet asset that is not limited by geographical boundaries. To transfer cryptography, one does not need a pipeline or a shipping container. A stable internet connection and some basic knowledge of crypto services are required to allow anyone in the world to transfer crypto assets.

Furthermore, cryptoassets are not issued or controlled by any company. There are just over 19 million bitcoins in circulation right now, out of a total limited supply (hence the scarcity) of 21 million bitcoins. Any of the estimated 75 million crypto wallet holders could own these bitcoins or their fractions (called satoshis or sats).

How then does one regulate such a homogeneous financial asset? How can regulators monitor capital flows into and out of their jurisdiction? The answers to these questions will lead us to a framework for regulating the crypto industry. Fortunately, a global consensus is emerging on this aspect.

Last June, amid all the attention on inflation and related turmoil in the financial markets, the European Parliament and the Council, the legislative bodies of the European Union, reached a tentative agreement on the long-awaited crypto regulation, ie. Regulation of Markets for Crypto Assets or MiCA.

It took two years of brainstorming and negotiations for Europe to arrive at this. But before analyzing MiCA, it is important to understand why European rules are noteworthy.

The European market is second only to the US in economic terms and to Asia in terms of the number of internet users. But Europe is the world reference in terms of technological regulations. First published in 2016 and implemented in 2018, the General Data Protection Regulation, or GDPR, marked a turning point in consumer data and privacy protection, not just in Europe but globally.

The GDPR introduced a framework for requesting consent from users and introduced several progressive rules such as the right to be forgotten. The Supreme Court of India has also ruled that the right to privacy is a fundamental right and an integral part of the right to life and liberty.

Set standards

Now Europe is showing us the way to regulate cryptoassets. So how does MiCA intend to regulate an asset that is not geographically restricted? It proposes to regulate cryptoasset services and cryptoasset issuers. By regulating these devices, Europe aims to deliver standards of consumer protection, transparency and governance, regardless of the decentralized nature of the technology.

For example, under MiCA, providers of cryptoassets will be liable for the loss of investors’ assets and will be subject to EU market abuse rules, including rules on market manipulation and harmful insiders.

Then MiCA goes further by offering specific rules for stablecoins that rightly distinguish them from other cryptoassets. Under the proposed rules, issuers of stablecoins – asset-referenced tokens is the term used – are subject to a higher level of compliance and reporting. Under MiCA, issuers of stablecoins must maintain reserves to cover all coin claims and must implement an immediate refund process if and when holders request one.

The TerraUSD example

It is important. The recent collapse of TerraUSD, an algorithmic stablecoin that lacked sufficient reserve and primarily relied on balancing supply and demand with its sister coin, Luna, had caused heavy losses to retail and institutional investors. If Europe’s proposed laws were in effect, TerraUSD issuers would have had to maintain a 1:1 reserve, which would have prevented the bank run that rocked the crypto market.

To be clear, Europe still has some way to go to implement these proposed rules. But as GDPR did for data protection, Europe has shown the way to regulate crypto in a way that holds companies accountable and protects users. It wouldn’t take too long for other nations to follow suit.

Ashish Singhal is the co-founder and CEO of CoinSwitch

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