A breakthrough in cryptocurrency regulation, led by Europe

If the GDPR marks a watershed moment in consumer data protection, MiCA could aim for responsible cryptocurrency management

If the GDPR marks a watershed moment in consumer data protection, MiCA could aim for responsible cryptocurrency management

There has been a lot of noise over Finance Minister Nirmala Sitaraman’s response to a recent question in Parliament about 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 cryptocurrencies in India.

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From what I have read, the only thing that reveals the finance minister’s response is that if the Indian central bank wants a ban on cryptocurrencies, any legislation to “regulate or ban cryptocurrencies” can only be effective after major international collaboration. .

An impeccable advantage

It’s true. Encryption is a native Internet resource that is not limited by geographic boundaries. To transfer encryption, you don’t need a pipeline or container. A stable internet connection and basic knowledge of crypto services are required to allow anyone in the world to transfer crypto assets.

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

How then to regulate such a homogeneous financial activity? 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 cryptocurrency industry. Fortunately, a global consensus is emerging on this issue.

Last June, amid all the attention on inflation and the related turbulence in the financial markets, the European Parliament and the Council, the legislative bodies of the European Union, reached a provisional agreement on the long-awaited crypto regulation, or the regulation of cryptocurrency markets, or MiCA.

It took two years of brainstorming and negotiations for Europe to come to this. But before analyzing MiCA, it is important to understand why European regulations are remarkable.

The European market ranks second after the United States in economic terms and behind Asia in the number of Internet users. However, Europe is the world reference in terms of technological regulations. Le règlement général sur la protection des données, ou GDPR, publié pour la première fois in 2016 et mis en œuvre in 2018, a marqué un tournant dans la protection des données des consommateurs et de la vie privée non seulement en Europe mais dans le monde entire.

The GDPR has 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 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 cryptocurrencies. So how does the MiCA intend to regulate an asset that is not geographically limited? It is proposed to regulate cryptocurrency services and cryptocurrency issuers. By regulating these entities, Europe aims to provide standards of consumer protection, transparency and governance, regardless of the decentralized nature of the technology.

For example, under the MiCA, cryptocurrency service providers will be liable for the loss of investors’ assets and will be subject to EU regulations on market abuse, including those on market manipulation and internal wrongdoing.

Hence, MiCA goes further by offering specific regulations for stablecoins, rightfully distinguishing them from other crypto assets. Under the proposed rules, issuers of stablecoins (the term used is asset-referenced token) are subject to a higher level of compliance and reporting. According to the MiCA, issuers of stablecoins must maintain reserves to cover all requests for coins and must implement an immediate redemption process if and when holders request it.

The TerraUSD example

It’s important. The recent collapse of TerraUSD, an algorithmic stablecoin that lacked adequate reserves and relied primarily on balancing supply and demand with its sister currency, Luna, had caused severe losses to retail and institutional investors. Had the laws proposed by Europe been in place, TerraUSD issuers would have had to maintain a 1: 1 reserve, which would have prevented the bank run that rocked the cryptocurrency market.

To be clear, Europe still has a long way to go to implement these proposed rules. But like the GDPR for data protection, Europe has shown the way to regulate cryptocurrencies in ways that make companies accountable and protect 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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