Tag Archives: regulation

No Credit in the Bank

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In a shocking turn of events, Credit Suisse – the second largest lender in Switzerland – has been acquired by UBS in a shotgun marriage on March 19, 2023. The failure of Credit Suisse has been attributed to a spill over of market fear caused by the default of regional banks in America, notably Silicon Valley Bank. Investors turned their attention to the European market, speculating on which bank would be the next to falter. With numerous scandals plaguing the Swiss lender, it was an easy target for speculators.

Credit Suisse had tried to transition into the investment banking styles found in the US and UK but this has only resulted in a series of scandals. The bank has been accused of allowing drug dealers to launder money, of giving loans to corrupt government officials in Mozambique, and more recently of allowing a massive data leak in 2022. Notably, Credit Suisse participated in an absurd situation where they surveilled former executive Iqbal Khan after he joined rival UBS. Due to the acquisition, Mr. Khan is now attempting to keep Credit Suisse bankers for UBS.

However, many banks of this size experience their fair share of scandals. What worried investors most was Credit Suisse’s underperformance – its revenues have fallen roughly 50% in the last ten years. This, coupled with rising interest rates and a general lack of confidence in the bank’s new management, made it an easy target. All eyes turned to the Saudi National bank, 9.9% shareholders of Credit Suisse. Ammar Al Khudairy, chairman of the Saudi National bank was asked if they would provide liquidity or further investment if Credit Suisse experienced more problems, to which Mr. Al Khudairy responded ‘absolutely not’. This seemed to be the straw that broke the camel’s back as Credit Suisse’s stock began to tumble after this interview.

Swiss regulators stepped in to force UBS to acquire Credit Suisse hoping to salvage as much value as possible from the failing banks as well as trying to reduce spill over effects. As part of the acquisition Swiss regulators promised common shareholders some form of compensation. Alternative Tier 1 (AT1) bonds were rendered worthless as a result of this ruling, which caused controversy among bondholders because it appeared to deny the widely held belief that debt is given priority over equity in bankruptcy. The central bank of the UK has condemned this decision and assured AT1 bondholders that they will hold preference over common equity in the event of a failure of a British bank. However, the Swiss regulators defended their decision citing the fact the AT1 bonds were created to absorb losses in this type of scenario.

The failure of Credit Suisse has shattered investors’ hopes that the banking crisis was limited to US regional banks. Attention has now turned to finding the next victim of the liquidity crisis. Deutsche Bank has come under fire but seems to have weathered a nervous period where its stock had dropped over 8% on one Friday. The stock rebounded over 4% on the following Monday. Central banks across Europe have also come out in defence of their banks citing the stricter regulations they adhere to compared to US banks. The ECB have also raised interest rates by 50 basis points. Although this may create further strain on the banking system, it is also a show of confidence that the banks can handle another hike in interest rates.

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.