EDITORIAL ANALYSIS: A turning point in crypto regulation, led by Europe

Source: Hindu

• Qualifying: Indian Economy, Cryptocurrency, Blockchain
• Main GS Paper III: The impact of cryptocurrencies on fiscal policy, monetary policy, and fiat currency.

article highlights

• The finance minister recently answered a question in parliament about the Indian government’s stance on cryptocurrencies. Some even suggested that there are new plans to ban cryptocurrencies in India.
• The finance minister’s response said that while India’s central bank wants to ban cryptocurrencies, “Regulations or virtual currency bans” will only come into effect after significant international cooperation.
• In June of this year, with inflation and related capital market turmoil in the spotlight, European Parliament and Council, European Union legislative bodies reach long-awaited provisional agreement Crypto Regulation, i.e. Market Regulation of Crypto-Assets, or MiCA.

Insight into the problem

environment

Cryptocurrency:

• Cryptocurrency, also known as cryptocurrency or cryptocurrency, is any form of currency that exists. Secure your transactions digitally or virtually using encryption.
• Cryptocurrencies have no central issuing authority or regulator, instead using a decentralized system to record transactions and issue new units.
• This is supported by a decentralized peer-to-peer network called blockchain.

Benefits related to cryptocurrencies:

• Fast and cheap transaction: Cryptocurrencies are much cheaper to use to conduct international transactions because the transactions do not have to be processed by a series of intermediaries before they reach their destination.
• investee:

1. Partly like gold, the supply of cryptocurrencies is limited.
2. Moreover, over the last few years, cryptocurrency prices have risen faster than other financial instruments.
3. For this reason, cryptocurrencies may become a preferred investment destination.

• anti-inflation currency: Due to the high demand for cryptocurrencies, their prices are generally on an upward trend. In this scenario, people tend to hold more cryptocurrency than they spend it.This has a deflationary effect on the currency.

Disadvantages associated with cryptocurrencies:

• Highly Volatile: Cryptocurrencies are highly volatile assets, gaining popularity due to their unregulated nature, and the risk of volatility puts the macroeconomic stability of countries, especially those with weak socioeconomic fundamentals, at risk. have established concerns about the potential impact of
• Unregulated Nature: The International Monetary Fund (IMF) has also advised El Salvador that there are significant risks associated with the use of Bitcoin for financial stability, financial integrity, consumer protection, and related financial contingencies. requested to limit the scope of unsecured assets.
• Pay taxes with cryptocurrencies: Countries like the CRA expose the risks associated with paying taxes in cryptocurrencies when taxes are paid using cryptocurrencies but spending remains in local currency.
• no clear mechanism: Unlike equities and currencies, cryptocurrencies are not subject to a clear mechanism and are speculative assets, so central banks do not have a reference point to devise interest rates according to domestic requirements.
• counterproductive utility: Blockchain may be useful for tracking transactions, but not for tracking parties. Therefore, it can be used for money laundering, terrorist financing, or other illegal activities.

How do governments view cryptocurrencies?

• discourage widespread use of cryptocurrencies: Many countries are taking steps to discourage the widespread use of cryptocurrencies.
• China and Russia banned, India taxed: Countries such as China and Russia have chosen to ban cryptocurrencies outright, while India seeks to tax and heavily regulate them.
• RBI in favor of ban: In India, the government has not outright banned cryptocurrencies, but the Reserve Bank of India has strongly advocated the need for a full ban on cryptocurrencies.
• Challenging central bank monopolies: Central banks are wary of private cryptocurrencies as they challenge the monopoly of the economy’s money supply that central banks currently enjoy.
• Economic management: Widespread acceptance of cryptocurrencies will influence how central banks manage the economy’s money supply.
• Affects the ability of governments to fund spending: It will also affect the ability of governments to create new money to fund spending, as citizens will be able to choose to switch to alternative currencies.

Why are cryptocurrencies considered a seamless asset?

• Cryptography is an Internet-specific asset that is not restricted by geographical boundaries.
• No pipelines or shipping containers are required to transfer crypto.
• A stable internet connection and basic knowledge of crypto services are required to allow anyone in the world to transfer crypto assets.
• Crypto assets are not issued or controlled by any company.
• there is a little over 19 million bitcoins Of the total capped supply (and thus scarcity) currently in circulation, 21 million bitcoins.
  • one of the quotes 75 million crypto wallet holders You may own these Bitcoins or their fractions (called satoshis or sats).

Regulation of the Crypto Asset Market by the European Parliament (MiCA):

It proposes to regulate cryptocurrency services and cryptocurrency issuers.

• Consumer protection, transparency and governance standards: By regulating these entities, Europe intends to provide consumer protection, transparency and governance standards regardless of the decentralized nature of technology.
• Crypto Asset Service Provider Responsibilities: Cryptocurrency service providers are liable for the loss of investor assets and are subject to European market abuse regulations, including those relating to market manipulation and insider trading.
• Specific Regulations for Stablecoins: Under the proposed rule, stablecoin issuers (asset reference tokens, the term we use) will be subject to a higher degree of compliance and declarations.
• Reserve to cover all claims of the coin: Under MiCA, stablecoin issuers are required to maintain reserves to cover all claims on their coins, and implement processes for immediate redemption should owners ask for it. need to do it.

way forward

• Regulation is the solution:

1. Regulation is necessary to prevent serious problems, keep cryptocurrencies from being abused, and protect unsuspecting investors from excessive market volatility and possible fraud.
2. Regulation must be clear, transparent, consistent and fueled by the vision it seeks to achieve.

• Clarifying the definition of cryptocurrency: The legal and regulatory framework should first define virtual currency as a security or other financial instrument under the relevant national law and identify the responsible regulator.
• Strong KYC Code: Instead of outright banning cryptocurrencies, governments should regulate cryptocurrency trading by including strict KYC standards, reporting, and taxability.
• Ensuring transparency: Record keeping, inspections, independent audits, investor complaints handling and dispute resolution may also be considered to address transparency, information availability and consumer protection concerns.
• Europe leads: Europe shows how to regulate crypto in a way that enables responsible business and protects users. It won’t be long before other countries follow suit.
• Privacy and data protection rights: of General Data Protection Regulation (GDPR) iIntroduced a framework for asking for user consent and introduced some progressive rules such as the right to forget.
  • of 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.
• Limited supply: The fact that the precious metal’s supply is limited has helped ensure its value. cannot be

Exercises

1. Discuss how emerging technologies and globalization contribute to money laundering. Elaborate measures to tackle the problem of money laundering at both national and international levels. (UPSC 2021)

(200 words, 10 marks)