Category Archives: Current Affairs

The Future of Digital Assets in the EU 

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Many people have long seen the market for digital assets as the Wild West of investing, filled with lucrative volatility and a significant risk of fraud. However, the European Commission’s Markets in Crypto-Assets (MiCA) is a regulatory framework that seeks to change this. MiCA is due to come into effect in 2024 with the dual objectives of harmonisation of existing EU regulations and the protection of investors.

One of the key impacts of this new framework will be to broaden the scope of existing regulation to include additional Virtual asset service providers (VASPs). Owing to the market’s rapid development, many service providers are unregulated, putting investors at risk of exploitation. Crypto-asset service providers (CASPs) is a term that exists in many other jurisdictions and has now been adopted by MiCA’s drafters to replace the Financial Action Task Force’s well-known definition for VASPs. The CASP definition is very similar to the original definition however it is much broader in scope so as to provide for as many crypto-related entities as possible. The most important thing to understand is that all VASPs will be considered CASPs but not all CASPs will be VASPs as they will fall outside the previous, narrower definition.

VASP definition:

  1. Exchange between virtual assets and fiat currencies;
  2. Exchange between one or more forms of virtual assets;
  3. Transfer of virtual assets;
  4. Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
  5. Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

CASP definition: 

  1. The custody and administration of crypto-assets on behalf of third parties; 
  2. The operation of a trading platform for crypto-assets; 
  3. The exchange of crypto-assets for fiat currency that is legal tender; 
  4. The exchange of crypto-assets for other crypto-assets; 
  5. The execution of orders for crypto-assets on behalf of third parties; 
  6. Placing of crypto-assets; 
  7. The reception and transmission of orders for crypto-assets on behalf of third parties;
  8. Providing advice on crypto-assets;

MiCA will also regulate the digital assets which currently fall outside the scope of EU and Member State regulations, such as e-money tokens, asset-referenced tokens and utility tokens. Surprisingly, MiCA does not address non-fungible tokens (NFTs), although the European Commission has indicated that it will address them in the future.

When MiCA comes into effect it will be applicable across the EU, without requiring Member States to introduce implementation laws. This uniform approach will bring about greater clarity and certainty for CASPs who are currently faced with differing domestic regulations across Member States. For example, MiCA will streamline the licensing process for crypto-asset issuers and make it valid across all Member States. 

Notwithstanding the greater ease of doing business, the regime itself will impose stricter obligations on CASPs so as to protect investors from market abuse and ensure transparency. These obligations relate to the authorisation of issuers and the marketing of crypto-assets themselves, as well as the requirement to publish reports and whitepapers. However, issuers that operate on a smaller scale will be exempt, such as those that deal with less than 120 investors per Member State. 

While some CASPs may be sceptical of MiCA’s impact on their business models, the Commission anticipates that the increased protection will attract investors. For example, CASPs involved in the custody of digital assets (custodians) will be required to store their customers’ assets separately to their own data, using Distributed Ledger Technology (DLT). This will ensure the assets are more secure in the event of a malware attack. Furthermore, these custodians will also be liable for losses that result from hacking or break down in technology. These requirements will undoubtedly increase consumer confidence and thus stimulate investment. 

Finally, it is interesting to note that because the safeguards relate to EU consumers, these changes will also apply to any firms outside the EU who wish to do business in the EU. Therefore, MiCA will have far-reaching implications for both CASPs and investors in the digital assets market not just in the EU but around the world. As Dublin is one of the world’s investment fund and asset management hubs it will be interesting to see what opportunities and challenges arise as a result of MiCA.

Big Four: Potential Audit and Advisory Split 

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The Big Four accounting firm EY are only one step away from restructuring the firm. Their audit and advisory services would be separated as a result of the restructure. All that remains is for the 13,000 EY partners throughout the world to vote in favour of or against the split. It would be the biggest change in the accounting industry in decades. 

First of all, in case you’re unfamiliar, the Big Four accounting firms are PWC, KPMG, EY, and Deloitte. They are the top accounting firms worldwide, providing tax, consulting and auditing services in over 150 countries. In 2021, they earned a combined worldwide revenue of $167.2 billion. 

EY managers have finally accepted a plan to split their audit and advising businesses after months of discussion about a split in the audit and advisory services. The plan would potentially see the audit division retaining the EY name and the advisory division becoming its own company with a new name. However, it will not be as easy as it may sound. The distribution of the tax division, which is essential to both the audit and consultancy services, is one of the key concerns of the split.

So why are they splitting? The primary goal of the division is to prevent conflicts of interest from limiting the growth of the audit and advisory divisions. This stems from when one division is not allowed to work with the clients of the other division. The split would open up many more potential clients to the new advisory company and would help the advisory sector’s expansion.

A statement released by EY on the 8th of September states: 

“EY leaders have reached the decision to move forward with partner votes to separate into two distinct, multidisciplinary organizations. We expect this phase to continue through the end of the year, with voting expected to begin on a country-by-country basis in late 2022 and conclude in early 2023.”

Budget 2023: An Overview

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The Budget 2023 is one of the most significant budgets in years. The significant tax surplus received
by the exchequer this year is being used to ease the cost of living crisis for those who need it most.

Welfare

Weekly Social Welfare payments will increase by €12 for all recipients, as well as
those with a State pension. There has also been an increase in the number of Lump Sum
payments, such as double child benefit being handed out in November as well as an increase
in Christmas payments for those on the Disability allowance and Living Alone allowance.

Tax

The government has increased the level for paying 40% income tax from €36,800 to
€40,000. This move will help middle income earners take home more money, to alleviate
some of the cost of living pressures. The second USC bracket (2%) has also been increased
from €21,295 to €22,920.

Energy

In a direct response to the energy crisis, the government has committed to giving
out €600 in electricity credits during the winter months. The first instalment will be handed out
before Christmas, with the other two coming in the New Year.

Housing

The government is set to introduce a tax credit worth €500 for renters; as rents
have continued to rise significantly in the country. They have also introduced a Vacant Home
Tax, to be placed on residential property that is occupied for less than 30 days in a 12
month period. This policy will hopefully encourage more efficient land use.

Education

College fees will be cut by €1000 in a once-off reduction to help alleviate
inflationary pressures, as well as the SUSI grant being increased by 10-14% in September
2023.

Health

Free contraception will be available for all women between the ages of 16-30.

End of an Era: The ECB Waves Goodbye to Negative Interest Rates

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In July of this year, the European Central Bank (ECB) ended its historic eight-year policy of negative interest rates. Motivated by the European debt crisis, the ECB slashed interest rates below zero in an effort to push banks to lend more and boost economic growth in June 2014. An unorthodox approach to monetary policy—the announcement made headlines for its experimental attempt to prop up a eurozone economy that was showing strong signs of deflation.

What do negative interest rates mean?

One of the primary responsibilities of central banks is to make it more or less attractive for households and businesses to save or borrow. They achieve this through the use of monetary policy tools such as interest rates. The implementation of negative interest rates by the ECB appeared to be a rewriting of the conventions of economics at the time of its introduction. Banks have traditionally operated in such a way that savers earn interest on deposits and borrowers pay interest on loans. Interest rates of below zero flip this concept on its head, with lenders paying to hold their money on deposit in the bank while borrowers are paid to take on loans.

Sub-zero: A failed experiment?

As the era of the negative interest rates experiment has now drawn to a close in the eurozone, the results of the policy have been mixed with slow growth. The ECB has estimated that extra bank lending increased by an average of 0.7 per cent and that the policy created an extra 0.4 to 0.5 percentage points of economic growth. But the policy was not entirely well received by member states. Critics of the policy felt that it created asset bubbles and encouraged cash hoarding. Other opponents felt it unfairly hurt the yield on European pension savings. The Bank of Japan (BoJ) is now the only remaining central bank adopting negative rates. Despite pressure to protect the strength of the Yen, the BoJ continues to stick to dovish monetary policy as underlying demand remains weak and inflation remains low at 3 per cent.

Inflation running rampant

The decision by monetary policymakers to increase interest rates has come amidst a rapid surge in eurozone inflation. Record high price levels have induced ECB president, Christine Lagarde, to make a U-turn on the policy of negative interest rates, with the ECB raising rates for the first time in 11 years last July.

Up until then, the ECB was charging banks minus 0.5 per cent on surplus deposits before moving the key rate to zero. Rates were hiked further in September by a record margin of 75 basis points on the back of inflation of 9.1 per cent in August. The ECB is expected to continue to increase rates in the coming months to bring inflation back down towards the bank’s target of 2 per cent. Philip Lane, the ECB’s Chief Economist, has signalled that planned future increases will likely come in smaller increments.

Europe’s 25-year inflation high is largely driven by soaring energy prices, which are rising at an annual rate of 38.3 per cent, due to Russia’s invasion of Ukraine. Around the world, monetary policymakers are turning to hawkish rate hikes to wrest control of surging prices. US Federal Reserve Chair Jerome Powell lifted interest rates by a third consecutive three-quarter basis point yesterday with further tightening planned. The Fed forecasts the benchmark rate to rise to 4.4 per cent by the end of the year.

When it comes to interest rate hikes, monetary policymakers have to tread carefully. A fine balancing act is required as aggressive efforts to curb spending may run the risk of triggering a large and deep recession.

Ethereum Upgrade “Merge” Represents a Shift Forward in the Future of Cryptocurrency and Blockchain

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Since the formulation of Bitcoin in 2009, the ground-breaking idea of using blockchain to generate what is now known as “cryptocurrency” has attained a level of popularity, even in the face of tremendous volatility, that detractors could never have imagined. Ethereum was first conceptualised in 2013 and brought to life in 2014 by programmer Vitalik Buterin. The cryptocurrency was founded not as a currency in itself, but as a platform with a goal to fully decentralise the internet. Since its formation, Ethereum has grown to earn its position as the second-largest cryptocurrency in the world with a current market cap of $163.28bn, despite a recent but steady fall in price of 66% from annual highs. 

Although Bitcoin and Ethereum are quite different with regards to their structure and capabilities, they have faced common criticisms by both observers and users alike. “Proof-of-work” is the decentralised mechanism used by both whereby members of a network solve arbitrary mathematical problems that use massive amounts of computing power for mining new tokens and validating transactions. The total consumption of energy needed to fuel this computing power has been condemned. According to estimates, Bitcoin alone consumes as much energy as Poland. In the face of climate change and energy shortages, there has been increased pressure on governments and corporations to disincentivise the growth of such cryptocurrencies based on the system of proof-of-work. The White House proposed restrictions on proof-of-work mining earlier this month as a way to reduce energy consumption. 

These problems prompted Ethereum developers to reconsider the “proof-of-work” system and led to the proposal of a “proof-of-stake” upgrade to underwrite Ethereum. This project eventually led to the “Merge” that took place last Thursday, 15th September which went off without a hitch. The proof-of stake mechanism is based on the work of “validators” rather than “miners”. These validators are compensated modestly in return for their validation of transactions and collateralize their own cryptocurrency which deters dishonest or lazy work. Over 100 developers worked on the upgrade for years to ensure minimal risks for bugs and the new mechanism is estimated to cut energy consumption by the cryptocurrency by roughly 99.95%.

The upgrade will significantly reduce the quantity of Ether (Ethereum’s token) coming into circulation which may allow it to serve as a deflationary currency in the coming months. Ethereum may well become more accessible for institutional investors as corporations can no longer use the wasteful use of energy as an excuse to ban its use in portfolios. Institutions such as Bank of America have recently indicated that the upgrade may ease their current restrictive policy on Ethereum. Cryptocurrency advocates say the transition marks a turning point in the future of digital assets while critics argue that a number of challenges remain. While the “Merge” will accelerate the process of introducing upgrades and make Ethereum more efficient, it will still face the inherited problems of congestion and very high transaction costs. The proof-of-stake upgrade represents more than just a change in operating system. Proof-of-stake has now been proven to be a suitable mechanism for operating blockchain technology and will have broad implications for the innovation of digital assets in the future. 

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