EU’s landmark MiCA legislation will drive crypto prices

The EU Parliament passed the Markets in Crypto Act, or MiCA, on Thursday which will come into force next year and has been hailed as a “landmark moment” for cryptocurrencies that will “help drive prices” for the likes of Bitcoin.

Stefan Berger, the MEP who led the bill’s creation, said in an emailed statement that Europe is now the “first continent with comprehensive regulation for crypto assets.”

“In order for new coins to be approved in the EU, it must be ensured in future that their business model will not endanger our currency stability,” he said.

“The new supervisory structures will also be a bulwark against Lehman Brothers moments like the crypto exchange FTX.”

The MiCA legislation means that the EU will have a unified approach to crypto asset regulation across all 27 member states, meaning firms approved in one country can “passport” their operations into others.

“This is a landmark moment for crypto. It signals the maturing of the market and underscores that cryptocurrencies are now mainstream,” said Nigel Green, the CEO of deVere Group, a leading independent financial advisory and fintech.

“Crypto has now come of age in Europe as it is being brought into the regulatory tent and being held to the same standards as the rest of the financial system.”

Green has long been campaigning for regulation of the cryptocurrency market since he launched the deVere Crypto exchange in 2018.

Lobbying

“We’ve been lobbying authorities on this issue as greater regulatory scrutiny is needed as digital currencies, including Bitcoin and Ether, are set to play an ever-greater role in the international financial system.

“We’ve been pushing for a strong regulatory framework to be established and approved at an international level.

“As such, we’re thrilled that the EU, the world’s largest trading bloc, voted 517 to 38 in favour of the Markets in Crypto Act, or MiCA, as it seeks to reduce risks for consumers buying crypto assets, meaning providers can become liable if they lose investors’ crypto assets.”

The deVere CEO said that with clear and consistent legislation in place, investors will have “more confidence in the market and feel more secure” in their investments.

“This will further attract more institutional investors who bring with them huge levels of capital, experience and influence, which can help increase demand and drive up prices in the long-term.”

The regulation will help reduce fraudulent activities in the market, serving to “improve the wider reputation of the industry and increase mass adoption” which will also maintain crypto prices on an upward trajectory.

Ahead of US-UK

The move puts the EU ahead of the US and UK, which are yet to bring in legislation for the crypto market. However, a UK official on Monday said regulation could be implemented within a year.

Green said the US and UK now have the opportunity to catch up with the EU on crypto regulation, which they inevitably will do – and probably sooner than many expect.

“Again, this must be welcomed as it will protect investors, tackle crypto criminality, and reduce the potential possibility of disrupting global financial stability, as well as offering a potential long-term economic boost to those jurisdictions which introduce it.”

He concluded that digital is the inevitable future of finance.

While an official update from the FHLB system on advances will be available later this month, estimates suggest that advances exceeded $1 trillion as of March.

While the FHLBs aided financial institutions in the recent crisis, the system was not originally designed to be a crisis lender.

The true “lender of last resort” is the Fed. The Fed’s discount window, which provides loans to banks against good collateral but usually at a rate above those available in FHLBs and private credit arrangements.

The discount window is the preferred vehicle for providing emergency credit to banks with liquidity—but not solvency—issues in a financial crisis like the current one.

The Fed has the supervisory experience and analytical tools to distinguish those risks, whereas FHLBs simply lend to financial institutions that meet the criteria.

Thus, we expect the Fed to pick up the mantle of providing liquidity support from the FHLBs as the crisis unfolds.

Therefore, borrowing from the discount window reached a record-high nominal value of $152.8 billion in the week ended March 15, although adjusted for inflation the global financial crisis peak was a little higher.

While discount window borrowing has declined in consecutive weeks since its peak, coming in at $69.7 billion in the week ended April 5, total primary credit borrowing remains elevated, slightly below late-2008 and early-2009 levels.

Meanwhile, utilisation of the Fed’s new and more favourable discount window facility, the Bank Term Funding Program, has increased steadily since its inception.

The BTFP is unusual in that it is a one-year rather than overnight facility that allows depositories to pledge qualified assets at par in exchange for advances at attractive rates, which required a backstop from Treasury to avoid putting the Fed at risk of losses. This is a key difference from the discount window, which values pledged assets—that can only be Treasuries or agency-backed debt—at fair market value.

Although BFTP take-up has increased, the pickup isn’t as fast as the decline in discount window borrowing. Moreover, utilisation has not cascaded in a way that would signal eligible banks’ positions are deteriorating, suggesting bank withdrawals have stabilised while contagion has not spread.

Even if we are at the apex of the crisis, banks will likely continue to tap federal backstops while interest rates are high to help alleviate pressures of unrealised losses.

Discount window borrowing, while elevated, is roughly one tenth the size of borrowing from the FHLB system.

The substantial disparity is likely due to the fact that the discount window is not intended to handle the large quantities of borrowing that the FHLB system is handling, as well as the stigma that is generally associated with borrowing from the Federal Reserve not being present when obtaining loans from the FHLB or other government-backed lenders.

Banks hesitate to utilise the discount window out of concern that they may be perceived as being in a financially vulnerable condition, perhaps reflecting the more onerous terms of the discount window that a healthy institution would avoid.

In response to the coronavirus pandemic, the Fed announced that it was removing the penalty component of the primary credit rate, which has been viewed by market participants as the Fed’s desire to reduce the stigma of discount window borrowing.

Although this will lower interest rate costs and potentially remove some of the perceived stigma, the discount window will remain a more costly option for borrowers due to the Fed’s greater haircut requirements than those imposed by the FHLBs.

Without the FHLBs, the cost of funding for many lenders, especially smaller banks, would become prohibitively expensive during times of stress, severely restricting the availability of all credit and potentially the viability of these institutions.