ESMA sees high risk for investors in non-regulated crypto assets
17 March 2021
Risk Analysis & Economics - Markets Infrastructure Investors
The European Securities and Markets Authority (ESMA), the EU securities markets regulator, today publishes its first Trends, Risks and Vulnerabilities (TRV) Report of 2021 . The Report analyses the impact of COVID-19 on financial markets during the second half of 2020 and highlights the increasing credit risks linked to significant corporate and public debt overhang, as well as the risks linked with investments in non-regulated crypto-assets.
Continued high risk across financial markets
Globally, risks in markets under ESMA’s remit remain very high. The significant rebound of equity markets and the valuation of debt indices which reached pre-pandemic levels, contrast with weak economic fundamentals. The main risk for European Union’s (EU) financial markets is that this ongoing decoupling leads to a reversal in investor risk assessment and a sudden market correction.
Crypto-assets: ESAs remind consumers about risks
As crypto-assets, including so-called virtual currencies such as Bitcoin, continue to attract public attention, the European Supervisory Authorities (EBA, EIOPA and ESMA – together the ‘ESAs’) recall the continued relevance of their previous warnings.
The ESAs remind consumers that some crypto-assets are highly risky and speculative and, as stated in the ESAs’ February 2018 joint warning, consumers must be alert to the high risks of buying and/or holding these instruments, including the possibility of losing all their money.
Additionally, crypto-assets come in many forms but the majority of them remain unregulated in the EU. This means that consumers buying and/or holding these instruments do not benefit from the guarantees and safeguards associated with regulated financial services.
In September 2020, the European Commission presented a legislative proposal for a regulation on markets in crypto-assets. Consumers are reminded that the proposal remains subject to the outcome of the co-legislative process and so consumers do not currently benefit from any of the safeguards foreseen in that proposal because it is not yet EU law.
Brexit is changing the trading landscape
The preparedness of market participants ensured that the end of the UK transition period had no discernible stability impact on securities markets. However, the implementation of the EU share trading obligation (STO) is changing the European trading landscape. In 2020 43% of shares with a legal entity in the EEA were traded on UK venues, and a large part of them fall under the STO. ESMA has analysed the evolution of trading between December 2020 and January 2021, and sees that the expected shift in trading domicile occurred in January. Most on-exchange trading moved to EU venues, with the share of lit trading on EU venues increasing to 96% in January, and auction trading to 93%.
Focus on risks for financial stability and investors
In its risk analysis, ESMA provides five in-depth articles looking at sustainable finance and particular market vulnerabilities during the Covid-19 crises:
Vulnerabilities in money market funds: This article uses evidence from the market stress during March 2020 to provide insights on EU money market fund vulnerability to liquidity risk and the impact of regulatory requirements;
This article uses evidence from the market stress during March 2020 to provide insights on EU money market fund vulnerability to liquidity risk and the impact of regulatory requirements; Fund portfolio network, a climate risk perspective: Within the European financial sector, investment funds are considered to have the largest exposure to climate sensitive economic sectors such as utilities, transport, and fossil fuels extraction. This article is a first attempt at a climate-related financial risk assessment of EU funds;
Within the European financial sector, investment funds are considered to have the largest exposure to climate sensitive economic sectors such as utilities, transport, and fossil fuels extraction. This article is a first attempt at a climate-related financial risk assessment of EU funds; Stress simulation in the context of COVID-19: During March 2020 investment funds faced a combination of significant deterioration in liquidity in some segments of the fixed income markets, combined with large-scale investment outflows from investors. Based on data from these events ESMA assesses fund preparedness to future liquidity shocks, involving a Stress Simulation exercise (STRESI);
During March 2020 investment funds faced a combination of significant deterioration in liquidity in some segments of the fixed income markets, combined with large-scale investment outflows from investors. Based on data from these events ESMA assesses fund preparedness to future liquidity shocks, involving a Stress Simulation exercise (STRESI); 54,000 PRIIPs KIDs - How to read them (all): European retail investors now receive more information than ever, and it can be challenging both for investors and supervisors to properly exploit and assess all this information. This article —an application of SupTech— aims to illustrate how these techniques can produce useful measures for European supervisors, policymakers, and risk analysts; and
European retail investors now receive more information than ever, and it can be challenging both for investors and supervisors to properly exploit and assess all this information. This article —an application of SupTech— aims to illustrate how these techniques can produce useful measures for European supervisors, policymakers, and risk analysts; and ESG ratings: As sustainable investing gains traction, environmental, social and governance (ESG) ratings are growing in importance for investors and issuers. This article describes the market for ESG ratings, including types of ratings and key providers, and presents several use cases.
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SA crypto startup enables users to earn interest on Ethereum and USDC -
South African-born cryptocurrency exchange startup Luno has announced that its users can now earn up to 4% interest per annum on Ethereum and up to 7.6% on their USDC balances.
Luno enables users to earn interest on Ethereum and USDC
Added to the savings wallet feature, both of these forms of crypto’s interest are earned and paid in cryptocurrency to users.
Marius Reitz, General Manager for Luno Africa provides insight into what led to the crypto startup launching the new offer.
“Luno research last year showed that over a third of those surveyed (35%) were not earning any interest on their traditional cash savings at all, so growing savings options and making saving simple and accessible is a priority for us. The same research from last year found 54% are not earning interest through their current or savings bank account, with 40% lacking confidence in their local currency.
The highly successful SA crypto startup has created a secondary method through which its users can earn a passive income on cryptocurrency holdings and is reportedly double the interest rate offered by local banks on a flexible savings account.
According to Luno, users earn interest immediately and will receive monthly interest payments. Luno claims that there are no hidden fees, no fixed terms, and no minimum deposits. Users have 24/7 access to their crypto with the Luno savings wallet.
“Luno users can already earn up to 4% on their Bitcoin savings. The addition of two new cryptocurrencies to the savings wallet gives customers even greater flexibility and potential to earn interest as they grow their crypto savings. A high percentage of South Africans who own cryptocurrency do so for speculative investment purposes, with the majority holding their crypto for the long term. If your crypto investment strategy is holding your crypto long-term (HODLing in crypto speak), the savings wallet earns you additional interest for what you were already doing,” concluded Reitz.
Read more: SA crypto startup ranks sixth globally
Read more: SA crypto startup expands into Australia
Featured image: Marius Reitz, General Manager for Africa at Luno (Supplied)
Tax surprise looms for NFT investors who use crypto
NFT non-fungible tokens art and collectables illustration, use blockchain technology to create unique digital items for crypto art, crypto-collectibles and crypto-gaming. holly harry | iStock | Getty Images
The NFT craze may come with a painful tax surprise for buyers and sellers who use cryptocurrencies, according to tax experts. Sales of NFTs, or nonfungible tokens, have exploded in recent weeks, topping $500 million in 2021, according to NonFungible.com. Along with the sale of the $69 million Beeple NFT titled “Everydays: The First 5,000 Days” at Christie’s last week, and the $3 million NFT sneakers, NFTs of everything from NBA highlight videos to Jack Dorsey tweets have created a vast new market of blockchain-based digital assets to buy and sell. Yet experts say buyers and sellers aren’t likely aware of an Internal Revenue Service tax rule that could come back to haunt them — and cost them a big chunk of their gains. It involves a steep potential tax on anyone who uses their highly valued cryptocurrency to buy NFTs, which experts say is most NFT sales. “People’s knowledge of this tax in the U.S. is very poor,” said Shehan Chandrasekera, head of tax strategy at CoinTracker, a platform for tracking crypto portfolios and taxes. “I just don’t think people know about it.” At issue is recent IRS guidance on using cryptocurrencies to buy an asset, including an NFT. As part of its principle known as “disposition of assets,” the IRS states that “if you exchange virtual currency held as a capital asset for other property, including for goods or for another virtual currency, you will recognize a capital gain or loss.” Chandrasekera said this has major implications for the NFT craze, which is largely being fueled by collectors using bitcoin or ether to buy NFTs. For example, if someone purchased a unit of ether for $100 in 2018, it’s now would worth around $1,700. If they used that ether unit to buy a $1,700 NFT, they might assume they pay no tax on the ether, since they’re simply using it to buy a good or service.
“EVERYDAYS: THE FIRST 5000 DAYS” is a collage, by a digital artist BEEPLE, that is on auction at Christie’s, unknown location, in this undated handout obtained by Reuters. Christie’s Images LTD. 2021/BEEP | via Reuters
But under the IRS rules, the ether is a capital asset not a currency. So the holder would have to pay tax on the gain of $1,600 as part of the NFT purchase, since the act of exchanging it for another asset counts as a sale or “disposition.” So they would owe the IRS — assuming a top capital gains rate of 20% — a tax of $320. They might also owe state taxes, since many states like New York and California tax capital gains as income. (The rules around additional sales taxes in each state for NFTs are less clear.) “You’re not spending currency, you’re spending an appreciated asset,” Chandrasekera said. “So just spending it creates a taxable event.”