Member of European Parliament, Stefan Berger – who has been the lead for incorporating MiCA regulation in Europe – explained that the law will protect consumers against fraud, provide security and bring about standardization of the crypto-asset industry in the region. This development is not only beneficial to the industry but also gives the EU a significant advantage and fits into its vision of becoming a global leader.
MiCA, once put into action, will have a broad scope of application within the crypto ecosystem. It will encompass 10 categories of Crypto Asset Service Providers including exchanges, trading platforms, wallet providers, and advisors dealing with crypto-assets. To become a CASP, a provider will have to obtain a license or “authorization” and must apply to the relevant “competent authority.” The regulation also defines Asset Categories and their issuers. The categories covered under MiCA are – Crypto Assets, Utility Tokens, Asset-referenced Tokens, and E-money Tokens. This broad inclusion into the regulation makes MiCA forward-looking and sets the foundation for encompassing future categories.
Web1 and Web2 have primarily been West-driven phenomena. In the past few decades, all social and even political narratives have been influenced, if not shaped, by these platforms. India, during the first two evolutions, didn’t hold the international stage or have the consumption capacity to be a part of Internet governance worldwide at the time. India today is a very different story – lauded by other nations for the low-cost high-impact digital infrastructure and one of the highest digital consumptions in the world. In fact, India’s digital sector is expected to contribute over $650 billion to the economy by 2027. Thus, Web3 provides a peculiar opportunity for India to lead the change from a centralized to a decentralized internet.
India can leverage the MiCA regulations to its own benefit in two major ways. First, India can incorporate parts of MiCA into its own regulation. This helps India maintain a common framework for regulation across borders, leading to higher adoption of new-age technologies like Web3 in India by international and national firms. Second, India can leverage the MiCA regulation to further one of its major G20 Presidency goals of bringing nations together to agree on a global framework for VDAs.As defined in the Income Tax Act, India has only one category – Virtual Digital Assets (VDAs) which, as per the definition in the IT Act, refers to “any information or code or number or token (not being Indian currency or foreign currency), generated through cryptographic means or otherwise” or “a non-fungible token or any other token of similar nature”. India, evidently, has defined crypto assets in order to tax them. MiCA, on the other hand, has managed to dive a little deeper to segregate these assets based on uses, with creating a more robust framework for regulating crypto. India has to define crypto based on its use and build regulations around that. Taxation should ideally follow regulation and not the other way around.
In a manner similar to other EU legislations, MiCA introduces passporting rights for CASPs (and issuers). A CASP licensed in Malta may passport its activities to other Member States, on a cross-border basis or via a physical branch, and approach clients in those Member States without additional authorization requirements.It is worth noting that companies that are already licensed as credit institutions, such as banks, or as Markets in Financial Instruments Directive (MiFID) firms providing specific investment services, are not required to submit a full application under MiCA. The rules for the issuers of crypto assets are also put in place by MiCA. Depending on the type of crypto-asset being issued, the regulations vary in nature.
The general sentiment in the market is of satisfaction with certain aspects of MiCA, and the prevailing perspective is that having a regulatory framework is better than having no rules at all and avoiding regulatory actions taken on a case-by-case basis without clarity. Instead of waiting for a perfect set of regulations, it is always best to implement a work-in-progress regulation, because technology will keep evolving and it will be difficult to catch up if time is spent on perfection.
MiCA has set an example for the rest of the world to take crypto evolution head-on and regulate it with an opportunity mindset and not a fear mindset. India can learn from this and move towards more holistic and comprehensive regulatory action on the VDA ecosystem. At present, there is no complete regulatory framework for VDAs in India. Taxonomy, like the one MiCA has established, should be simplified to promote ease of doing business in the country. Creating a few buckets to club similar use cases or defining products in broad buckets will help attract investment and entrepreneurial activity in the sector.
Although, despite the lack of comprehensive regulation, the Indian government has implemented certain measures to recognise VDAs under specific authorities, including taxation. In the 2022 Union Budget, the Finance Ministry acknowledged the “phenomenal increase” in cryptoasset trading in India and imposed a 30% tax on income derived from the transfer of any VDAs. Additionally, in March of this year, the government brought all transactions involving VDAs under the purview of the Prevention of Money Laundering Act (PMLA). Web3 also finds a mention in the consultative dialogue conducted for the Digital India Act. These measures are directional and helpful, although still piecemeal.
Like the PMLA, existing acts should be continuously leveraged to regulate certain aspects of crypto like defining VDAs (and Web3) in the Digital India Act.
Further, a comprehensive act to navigate through other aspects of VDAs can be introduced as is under preparation according to officials in the government. Moreover, VDAs should be brought under a capital gains regime – indicating to the country that the government is looking at the Web3 and VDA ecosystem from an opportunity lens rather than suspicion or fear.
The G20 nations, led by India’s Presidency, are presently working together to develop an international consensus for regulation in the crypto asset industry. Global Standard setters such as FSB, FATF, and IMF in their recommendations to the G20 can take inspiration from MiCA, certainly in a couple of areas. First, risk assessment – MiCA does an excellent job of categorizing assets based on the potential risks and their characteristics. Second, investor protection – MiCA focuses on mandatory disclosure requirements, consumer warnings, and rules for the custody of assets.
Third, regulatory clarity – MiCA highlights its aim to provide legal clarity and certainty for market participants operating in the crypto-asset space. India should endeavor that, at the end of its Presidency of the G20 later this year, there should be consensus on a globally coordinated policy response to crypto-assets, taking into account the full range of risks, including those specific to developing economies and emerging markets, relying, wherever possible, on the groundwork laid down by the MiCA.
(Dilip Chenoy is Chairman at Bharat Web3 Association)
