Tag: crypto regulation

New Crypto Law: How Will It Reshape The Crypto Market?

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In a landmark development for the cryptocurrency sector, the U.S. Congress has passed its first standalone crypto legislation. This significant move represents a major shift in the regulatory landscape for digital assets, targeting the controversial SEC’s Staff Accounting Bulletin No. 121 (SAB 121). but what is a “Crypto Legislation” and what are the particularities of this standalone legislation? Here are the full details of this legislative breakthrough, the background and criticisms of SAB 121, and the broader implications for the cryptocurrency market.

1- What is Crypto Legislation?

Crypto legislation refers to laws and regulations specifically designed to govern the use, trading, and management of cryptocurrencies and digital assets. These laws aim to provide a legal framework for various aspects of the cryptocurrency ecosystem, including but not limited to:

  1. Regulatory Compliance: Ensuring that cryptocurrency activities comply with existing financial regulations, anti-money laundering (AML) laws, and combating the financing of terrorism (CFT) measures.
  2. Consumer Protection: Protecting users and investors from fraud, scams, and other malicious activities in the crypto space.
  3. Market Integrity: Promoting transparency, fairness, and stability in cryptocurrency markets.
  4. Innovation Facilitation: Encouraging innovation and growth in the digital asset industry while maintaining a balance with regulatory oversight.
  5. Taxation: Establishing guidelines for the taxation of cryptocurrency transactions and holdings.

2- What is a Standalone Legislation and what is SAB 121?

Standalone legislation refers to a law or bill that addresses a specific issue or subject independently, rather than being part of a broader legislative package. Key characteristics include:

  1. Focused Scope: It targets a particular area or problem, providing detailed rules and regulations specific to that subject.
  2. Independence: It is not bundled with other laws or reforms, allowing for more straightforward and targeted discussion, debate, and implementation.
  3. Clarity and Precision: Standalone legislation often provides clear and precise directives, making it easier to understand and enforce.
  4. Timeliness: It can be introduced and passed to address urgent issues without waiting for larger, more comprehensive legislative efforts.

SAB 121, issued by the SEC, has been a contentious regulation since its inception. This bulletin requires entities holding crypto assets for users to record these assets as liabilities and corresponding assets at fair value on their balance sheets. Critics argue that this accounting treatment places undue financial burdens on banks and financial institutions, particularly those providing crypto custody services. The stringent requirements of SAB 121 could deter institutions from entering the crypto custody market due to the high costs and complexities involved.

3- What is the New Crypto Standalone Legislation? 

What Is the Target of This New Standalone Legislation?

After the inception of the SAB 121, many financial institutions declared its negative impact. 

So, the Congressional Review Act (CRA) was invoked to overturn SAB 121, marking a significant victory for advocates of financial innovation and regulatory reform. The new standalone crypto legislation passed by the U.S. Congress was mainly designed to:

  1. Overturn SAB 121: Address the specific requirements imposed by SAB 121, which mandated that entities holding crypto assets for users record these assets as liabilities and corresponding assets at fair value on their balance sheets.
  2. Relieve Financial Burdens: Mitigate the financial and operational burdens imposed on banks and financial institutions by SAB 121, facilitating their participation in the crypto custody market.
  3. Promote Financial Innovation: Support a more innovation-friendly regulatory environment for digital assets.

By focusing exclusively on the repeal of SAB 121, this standalone legislation aims to quickly and effectively address a pressing issue within the cryptocurrency industry without being delayed by broader legislative processes.

Who can overturn this Standalone Legislation?

Despite strong support in Congress for repealing SAB 121, and its praise by House Financial Services Committee Chair, President Joe Biden has threatened to veto the decision, citing concerns about financial instability and market uncertainty. The White House has warned that limiting the SEC’s regulatory authority over crypto assets could have adverse effects on the broader financial system. This stance underscores the complexities and competing interests in shaping crypto regulation, necessitating careful deliberation and collaboration among policymakers, regulators, and industry stakeholders.

4- How will the new Standalone Legislation affect the Crypto Market?

The repeal of SAB 121 and the passage of the CRA represent pivotal moments in the evolution of crypto regulation in the United States. By challenging the SEC’s regulatory framework and asserting congressional oversight, lawmakers have shown a willingness to address the flaws in existing regulations and adopt a more inclusive approach to digital assets. The outcome of this legislative effort will have far-reaching implications for the cryptocurrency market, influencing investor sentiment, market dynamics, and future regulatory trends.

The U.S. Congress’s decision to overturn SAB 121 is a significant milestone in the ongoing debate over crypto regulation. While the repeal is a victory for proponents of regulatory reform, the broader implications for the cryptocurrency market remain to be seen. As the dialogue among policymakers, regulators, and industry stakeholders continues, the need for pragmatic solutions and collaboration becomes increasingly critical. Ultimately, this legislative battle will shape the future trajectory of the crypto industry and its role in the global financial landscape.

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Explained | What is the EU’s new crypto-legislation?

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The story so far: The European Parliament, the legislative body of the 27-country block European Union, has approved the world’s first set of comprehensive rules to bring largely unregulated cryptocurrency markets under the ambit of regulation by government authorities. The regulation called the Markets in Crypto Assets (MiCA), will come into force after formal approval by member states.

Why regulation?

According to Chainalysis, about 22% of the global crypto industry was concentrated in central, northern, and western Europe, which received $1.3 trillion worth of crypto assets. Having a comprehensive framework like MiCA for 27 countries in Europe not only harmonises the crypto industry but also gives the EU a competitive edge in its growth compared to the U.S. or the U.K. which lack regulatory clarity. More importantly, 2022 saw some of the biggest failures and wipeouts in the crypto industry involving bankruptcies and fraud scandals, be it the collapse of the crypto exchange FTX and its spat with Binance or the failure of Terra LUNA cryptocurrency and its associated stablecoin. The liquidity shortage caused by these shocks led other crypto-lending platforms to halt customer transfers and withdrawals before filing for bankruptcy.

As investments and the size of the crypto industry grow, European and other regulators have felt the need to bring governance practices in crypto firms to ensure stability and financial sector-like rout and contagion. European Parliament member Stefan Berger, who is the lead for the MiCA regulation explained that the law will protect consumers against deception and fraud, and “the sector that was damaged by the FTX collapse can regain trust”.

What kind of assets will MiCA cover?

The MiCA legislation will apply to ‘cryptoassets’, which are broadly defined in the text as “a digital representation of a value or a right that uses cryptography for security and is in the form of a coin or a token or any other digital medium which may be transferred and stored electronically, using distributed ledger technology or similar technology”. This definition implies that it will apply not only to traditional cryptocurrencies like Bitcoin and Ethereum but also to newer ones like stablecoins.

Stablecoins are digital tokens that aim to stay pegged in value with a more stable asset — a fiat currency like the U.S. dollar or other stable cryptocurrencies. MiCA will establish new rules for three types of stablecoins — asset-referenced tokens, which are linked to multiple currencies, commodities, or cryptocurrencies, e-money Tokens, which are linked to a single currency and utility tokens, which are intended to provide access to a good or service that will be supplied by the issuer of that token.

As for the assets that will be out of MiCA’s scope, it will not regulate digital assets that would qualify as transferable securities and function like shares or their equivalent and other crypto assets that already qualify as financial instruments under existing regulation. It will also, for the most part, exclude nonfungible tokens (NFTs). MiCA will also not regulate central bank digital currencies issued by the European Central Bank and digital assets issued by national central banks of EU member countries when acting in their capacity as monetary authorities, along with cryptoassets-related services offered by them.

What are the new rules?

MiCA will impose compliance on the issuers of crypto assets, who are defined as the “legal person who offers to the public any type of crypto-assets”. It will apply to crypto-asset service providers (CASPs) providing one or more of these services — the operation of a trading platform like CoinBase, custody, and administration of crypto assets on behalf of third parties (customers), the exchange of crypto assets for funds/other crypto-assets, the execution of orders for crypto assets, the placing of crypto assets, providing transfer services for crypto assets to third parties, providing advice on cryptoassets and crypto-portfolio management.

The regulation prescribes different sets of requirements for CASPs depending on the type of cryptoassets. The base regime will require every CASP to get incorporated as a legal entity in the EU. They can get authorised in any one member country and will be allowed to conduct their services across the 27 countries. They will then be supervised by regulators like the European Banking Authority and the European Securities and Markets Authority, who will ensure that the companies have the required risk management and corporate governance practices in place. CASPs will have to demonstrate their stability and soundness, ability to keep the funds users safe, implementation of controls to ensure they are not engaging in proprietary trading; avoidance of conflicts of interest, and their ability to defend against market abuse and manipulation.

Besides authorisation, service providers of stablecoins also have to furnish key information in the form of a white paper mentioning the details of the crypto product and the main participants in the company, the terms of the offer to the public, the type of blockchain verification mechanism they use, the rights attached to the cryptoassets in question, the key risks involved for the investors and a summary to help potential purchasers make an informed decision regarding their investment. Issuers of stablecoins will also be required to maintain sufficient reserves corresponding to their value to avoid liquidity crises. Those stablecoin firms pegged to non-euro currencies will have to cap their transactions at a daily volume of €200 million ($220 million) in a specified region.

Another legislation passed with MiCA requires crypto companies to send information of senders and recipients of cryptoassets to their local anti-money laundering authority, to prevent laundering and terror financing activities.

What has been the reaction?

Leaders at some of the biggest cryptocurrency firms have taken exception to some aspects of MiCA but the broad view is that it is better to have a regulatory framework than having no rules at all and attracting regulatory action on a case-by-case basis without clarity.

Meanwhile, since it’s been three years since MiCA has been in development, some experts feel that the regulation is already laggard in covering newer vulnerabilities in the crypto industry. For instance, it does not cover practices like crypto staking and lending, which led to some of the industry’s biggest failures last year. A Bloomberg analysis notes that MiCA also does not cover NFTs or decentralised finance, which is prone to hacks and fraud because it’s managed by code rather than humans.

How is crypto regulated in India?

India is yet to have a comprehensive regulatory framework for crypto assets. A draft legislation on the same is reportedly in the works.

A full-fledged regulation aside, the Indian government has taken certain steps to bring cryptocurrencies under the ambit of specific authorities and taxation. In the Union Budget for 2022, the Finance Ministry said that cryptocurrency trading in India has seen a “phenomenal increase” and imposed a 30% tax on income from the “transfer of any virtual digital asset.” In March this year, the government placed all transactions involving virtual digital assets under the purview of the Prevention of Money Laundering Act (PMLA).

However, statements by ministers and bureaucrats after the Budget seem to suggest that the legality of cryptocurrencies in the country is still a grey area. India is now calling for consensus in the G20 grouping, where it currently holds the presidency, to have a globally coordinated policy response on crypto assets that takes into consideration the full range of risks, including those specific to emerging markets and developing economies.

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