25th January 2023 > > EU regulation.

tl;dr

The very positive gains recently made in EU regulation of cryptos are being obstructed.

Market Snap

Market Wrap

The CCC of 13th January 2023 “The end of the crypto winter” looked at some of the possible psychological responses to market moves that may or may not have a material impact.

Glassnode reports (https://insights.glassnode.com/the-week-onchain-week-04-2023/?utm_campaign=woc_04_2023&utm_medium=woc_newsletter&utm_source=email) that the Percentage of Short-Term Holder Supply in Profit is now above 97.5%.

Glassnode claims that this is a point at which investors “… tend to seize the opportunity and exit at break-even or profit.” And indeed, the trading volume of coins which last moved less than six months ago is “well above the long-term declining trend”. This is alongside some significant sell-pressure from miners, whose cash flow generation has been somewhat constrained of late.

Balanced against this is the rate of growth of older coins matched also with the fact that on average, long-term holders are at break-even, or thereabouts, though with the proviso that 2021/2022 investors remain “overwhelmingly underwater on their holdings”.

How these two competing forces play out will likely determine short-term price action.

Curious Cryptos’ Commentary — EU regulation

MiCA (Markets in Crypto Assets) has often been discussed in these pages as a sensible and welcome piece of crypto regulation, and my praise for the EU has rung out loud and clear.

Though MiCA has been agreed at all levels of the EU bureaucracy, the final vote in favour has been delayed again until April to allow the text to be translated into 24 different languages. It is a quirk of the EU that legal acts must first be negotiated and agreed in English, a procedural issue that must keep President Macron of France in a permanent state of hypertension.

I would have expected by now that the process of translation for new laws would be robust and second nature to the pen-pushers of the EU, but apparently that is not the case. This unnecessary and avoidable delay is disappointing. Let us hope that the delay does not allow for a last-minute ambush by the naysayers.

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And here they come.

According to CoinDesk a recent report concludes that “A team of researchers commissioned by the French government said leaders should avoid previous mistakes made with the EU’s crypto rules when regulating the metaverse.”

Running to 116 pages none of us have time to read it in any depth, especially - as Macron will undoubtedly be delighted to hear - because it is written in French, and official French at that I assume.

Secondary sources claim that there is concern expressed in the report about data collection and user protection in the metaverse, which are both very legitimate concerns. Unfortunately, one of the remedies proposed is an extension of the EU’s very own GDPR (General Data Protection Regulation) which competes very highly for the least useful and most obstructive piece of legislation ever designed and implemented. Its continuing existence can only be due to one high ranking individual’s personal sponsorship of this huge waste of everybody’s time and money.

The report specifically states that future regulation should be driven by “experts” and not “industrial lobbies”, a stance which made GDPR possible in the first place.

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The EU is planning further regulatory progress addressing the capital requirements for banks and other regulated financial institutions when holding cryptos on their balance sheet, which is a most welcome development if executed in a constructive manner, bolstering the EU’s claim to crypto related tax dollars.

This is somewhat of an arcane subject for non-financial professionals, and we shall not get into the guts of it here, as some of you may never read the CCC again if I do.

Suffice to say that the Basel Committee on Banking Supervision sets out proposals for how much of a bank’s capital can be allocated to risky assets, proposals that are generally accepted.

Its proposals don’t always make sense. For example, the Committee claims that sovereign debt is entirely risk-free (tell that to Greek government bond holders just prior to the global financial crisis more than a decade ago now) but there is zero point in having that conversation.

Reuters reports that banks will have to allocate a risk-weighting of 1,250% against cryptos held on balance sheet, a punitive capital charge whose objective is clear – it is designed to prevent banks investing directly in cryptos, and to deter bank trading desks using their own balance sheet to facilitate client trades.

The net result of this will be the invention of new derivatives and SPVs (special purpose vehicles) that will circumvent such an onerous capital charge and will obfuscate the real risk in the banking system.

Don’t get me wrong – appropriate and targeted regulation is most important, but over-regulation is often at the heart of every financial crisis.

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The EU is also looking at setting bloc-wide tax regulation and rates. A report produced for the European Parliament’s 2023 budget states:

“A European tax on crypto-assets would foster the emergence of a harmonized tax framework for crypto-assets, be more consistent with the crossborder nature of the crypto-assets market, and encourage the adoption of tax standards at the global level”.

Such an initiative is bound to be strongly resisted by both Ireland and Liechtenstein, the two largest tax havens in the world. Harmonisation of tax rates is a dirty phrase in both countries.