The UK is taking an informal approach where all crypto assets that look like existing financial instruments will be regulated while everything else will continue to operate in the unregulated space.
In the meantime, the European Union has released a broad proposal for a ‘Crypto-Asset Markets Regulation’ (MiCA) that will tightly govern issuers and providers of crypto services while providing protections for consumers.
While there are many issues to be resolved with MiCA, the stability and clarity it offers could push EU countries to buy a crypto-leader.
As rumors of a blanket crypto ban and other regulations began to spread, the The Ministry of Finance has further stirred up the pot earlier this week, he said the government has no plans to boost the sector in the country.
Responding to a question for Rajya Sabha, Minister of State for Finance Pankaj Chaudhary reiterated that cryptocurrencies are not regulated in the country and instead shifted the conversation to central bank digital currencies, adding more fuel to the fire of miscommunication.
We’ve already written a story on what to expect from the upcoming crypto bill based on gossip from the government, the legal fraternity, and industry insiders. You can read this here. But what we’re going to do now is take a look at how other countries are handling cryptocurrency regulation and what we can learn from them.
Of all the different approaches that different countries are taking to manage what is called the ‘asset class of the future’, the difference between the way the European Union and the UK, which recently left first, approaching cryptocurrency presents the most interesting dichotomy.
“Looking at the UK and EU approach is very informative as they have very different approaches. In the UK, the philosophical thinking about cryptos is that if it looks like a stock or a bond, it will be regulated as such. If they don’t look like it, then they’re completely outside the regulatory scope, ”said Cyrus Pocha, partner at UK law firm Freshfields Bruckhaus Deringer, at a seminar attended by industry professionals. right.
United Kingdom: lots of space for no man’s land
The UK has taken an approach where they have divided all crypto assets into two categories: unregulated and regulated. The first includes all crypto-currencies, assets and tokens that resemble either conventional financial instruments, as well as security tokens and “electronic money tokens” (tokens that meet the definition of electronic money under the Electronic Money Regulations from 2011).
All tokens that fall into the first category are regulated tokens and their trade and use will be regulated under the Financial Services and Markets Act (FSMA) 2000 (Regulated Activities) Order 2001 (“RAO”).
All instruments regulated by the FSMA are exhaustively listed in the Act of Parliament and are referred to as “specified investments” and include stocks, bonds, fund interest and derivative contracts.
In order to determine whether a security token or ‘electronic money token’ is subject to regulation in the UK, it is necessary to analyze its function to see if it sufficiently resembles one of the financial instruments mentioned above. above to fall into the same Category. If so, it will be regulated in exactly the same way as the conventional financial asset.
But what about the large number of popular cryptocurrencies like Bitcoin and Ether that do not fall under these narrow definitions? This is where the UK’s regulatory approach gets really interesting – all of these coins, their trade and their use will remain unregulated.
But what does that mean? Does this make these cryptocurrencies illegal? No, this is not the case. People can still perform crypto transactions and transactions with these tokens, but those transactions will not be protected by the legal framework of regulation.
For example, if you want to reverse an electronic payment made using your credit card because it was fraudulent, you can ask your bank to do a “chargeback” because the credit card issuing authorities are. regulated entities. In the UK, the Financial Conduct Authority (FCA) regulates all credit card issuing institutions, and they must follow its mandate.
The UK regulatory framework allows for the legal use of cryptocurrency assets, but crypto users are not offered any of the protections afforded to those who engage in conventional financial transactions.
While this nonchalant approach simplifies the legal use of cryptocurrencies, it looks more like a way for authorities to wash their hands of any future incidents than a genuine attempt to clear the air for crypto users.
The European Union: nowhere to hide
Unlike the UK, the EU has decided to take an almost diametrically opposite approach in attempting to create a framework that comprehensively covers all types of crypto tokens and their use within its mandate.
On September 24, 2020, the European Commission released a proposal to regulate crypto assets titled “Cryptoassets Regulatory Markets“(MiCA). Once into force, MiCA will become applicable law in all EU member states and regulate all issuers and service providers dealing with crypto assets.
MiCA will be used to regulate all crypto assets that are not covered by existing regulations – this excludes security tokens which are covered by EU law. Markets in Financial Instruments Directive-II (MiFID), and regulated like stocks, bonds and investment funds. MiCA segregates all crypto-assets into the following categories:
- General crypto assets: a catch-all term for all assets that don’t fit into the rest of the categories (like bitcoin, litecoin, etc.)
- Utility tokens (for example, basic attention token)
- Asset referenced token (ART) (e.g. Libra Basket Coin)
- Electronic money token (e.g. USDCC, Tether)
Both ARTs and EMTs are stablecoins – EMTs are linked to a single fiat currency (like Tether with the US dollar) or linked to multiple fiat currencies or assets like gold.
Going forward, issuers of these crypto assets will need to publish a white paper and send it in advance for notification to their national financial regulatory authority. For example, in Germany it would be the Federal Financial Supervisory Authority (BaFin).
The regulatory authority then reserves the right to stop issuing tokens. In addition, for ARTs and EMTs, the European Banking Authority (EBA) is responsible for oversight and approval. Depending on the crypto asset class, issuers will need to meet different regulatory requirements before issuing different tokens.
Service providers offering crypto based services like brokerage, trading, etc. are required to obtain prior approval from national regulatory authorities to offer crypto asset services under MiCA. They will have to follow strict regulatory requirements taking into account initial capital reserves, IT infrastructure, business structure, etc. in order to offer crypto-based services in EU countries.
Some countries like Germany already license crypto-related financial services. MiCA arranges for these licenses to be “upgraded” to be MiCA compliant with a simple procedure.
Lessons to learn and pitfalls to avoid
Now the question is which direction India should take: the stifling and comprehensive framework adopted by the EU, or the flippant ‘let’s see what happens’ attitude of UK regulators? It might be wrong to think that the right approach is somewhere in the middle, but I would say that we would be much better off if we approached the ‘European attitude’.
Critics would point out that the EU’s approach could overstep its limits and amount to an excess of government power that imposes impossible constraints on businesses and stifles innovation. The UK’s straightforward approach leaves plenty of room for an open interpretation regarding the use of cryptos, allowing innovative businesses to thrive.
This is especially true for a country like India, where our legislators often have little regard for the effect that legislation has on people’s lives and sometimes pass laws with little or no debate.
But one Indian quality that we overlook is our propensity to circumvent laws and regulations, especially when they have loopholes that can be exploited. Not so long ago, some Indian crypto exchanges were flooding the country with announcements, with some of them referring to crypto investments like “Hai sure, hai simple” (Sure, it’s simple).
Amid all the uncertainties and turbulence surrounding cryptocurrencies in the country, the MiCA proposal is expected to serve as a beacon towards which Indian lawmakers must aim as they craft legislation to govern the new asset class in the country.
While MiCA has a lot of minor technical issues (and some major concerns) to address this, the stability and clarity it will bring to the use of cryptoassets is likely to make the EU a world leader in crypto businesses. It may be too optimistic to expect India to do the same, but hope is all we have.