There has been a lot of noise over Finance Minister Nirmala Sitaraman’s answer to a question recently in Parliament about the Indian government’s stance on cryptocurrencies. Some headlines even went as far as to suggest that there was a fresh plan to ban crypto in India.
As per my reading, the only thing the Finance Minister’s answer reveals is that while India’s central bank wants a ban on cryptocurrencies, any legislation for the “regulation or for banning crypto” can be effective only after significant international collaboration.
A seamless asset
This is true. Crypto is an Internet-native asset not limited by geographical boundaries. To transfer crypto, one does not need a pipeline or shipping container. A steady Internet connection and some elemental knowledge of crypto services are what are needed that will allow anyone in the world to transfer crypto assets.
Further, crypto assets are not issued or controlled by any enterprise. There are a little over 19 million bitcoins in circulation at present, out of the total capped supply (hence, the scarcity) of 21 million bitcoins. Any of the estimated 75 million crypto wallet holders could be owning these bitcoins, or their fractions (called satoshis or sats).
How then can such a seamless financial asset be regulated? How can regulators monitor the flow of capital in and out of their jurisdiction? Answers to these questions will lead us to a framework to regulate the crypto industry. Fortunately, global consensus is emerging on this aspect.
This June, amid all the attention over inflation and the related capital market turmoil, the European Parliament and Council, the legislative arms of the European Union, came to a provisional agreement on long-awaited regulations on crypto, namely, the Regulation of Markets in Crypto-Assets, or MiCA.
It took two years of brainstorming and negotiations for Europe to get here. But before we parse through MiCA, it is important to understand why European regulations are noteworthy.
The European market is second to the United States economically and behind Asia in terms of the number of Internet users. Yet, Europe is the global yardstick on technology regulations. The General Data Protection Regulation, or GDPR, first published in 2016 and implemented in 2018, marked a turning point on consumer data protection and privacy not just in Europe but the world over.
The GDPR introduced a framework for seeking user consent and introduced several progressive rules such as the right to forget. The Supreme Court of India has also held that the right to privacy is a fundamental right and an integral part of the right to life and liberty.
Setting standards
Now, Europe is showing us the path to regulate crypto assets. So, how does MiCA intend to regulate an asset not limited by geography? It proposes to regulate crypto asset services and crypto asset issuers. By regulating these entities, Europe intends to provide consumer protection, transparency, and governance standards, regardless of the decentralised nature of the technology.
For instance, under MiCA, crypto asset service providers will be liable in case they lose investors’ assets, and will be subject to European market-abuse regulations, including those on market manipulation and insider trading.
Then, MiCA goes further to put forth specific regulations for stablecoins, rightly demarcating them from other crypto assets. Under the proposed rules, issuers of stablecoins — asset-referenced tokens is the term it uses — are subject to a greater degree of compliance and declaration. Under MiCA, stablecoin issuers must maintain reserves to cover all claims of the coins, and should implement a process for immediate redemption if and when holders seek one.
The TerraUSD example
This is significant. The recent collapse of TerraUSD, an algorithmic stablecoin that had no adequate reserve and relied mainly on the demand-and-supply balance with its sister coin, Luna, had caused significant losses to retail and institutional investors. If the laws Europe proposes were in effect, TerraUSD issuers would have had to maintain 1:1 reserve, which would have prevented the bank run that roiled the crypto market.
To be clear, Europe still has some distance to cover to implement these proposed rules. But like the GDPR did for data protection, Europe has shown the way forward to regulate crypto in a manner that enables responsible businesses and protects users. It would not be too long for other nations to follow suit.
Ashish Singhal is the co-founder and CEO of CoinSwitch
