Chancellor Faces Taxing Test in Bid to Boost Capital Markets

The UK Treasury’s latest plan for stimulating its stock exchanges appears to be a temporary or permanent reduction in the stamp duty (tax) paid on transactions in shares of newly listed companies.

Advocates of stamp duty reform have long argued that the UK is at a competitive disadvantage to other major European markets as a result of the 0.5% tax levied on share transactions, pointing out that the US and Germany don’t levy any tax on such transactions.

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They claim that removing the stamp duty would stimulate trading in stocks of UK-listed companies and encourage more people to trade at a time when a lot of capital is lying idle in savings accounts.

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Previous research has suggested that even a minor reduction in transaction costs can boost stock prices considerably and that removing the duty could reduce the post-tax cost of equity of UK listed companies by as much as 8.5%.

One UK investment bank refers to a ‘pernicious’ tax that negatively impacts liquidity in UK equity markets and by extension the entire financial sector, which whether everyone likes it or not is a major contributor to the UK economy.

The problem the UK government faces is that stamp duty on shares raises several billion pounds every year. The Chancellor has been talking about making tough decisions on general taxation to improve public finances ahead of next week’s budget, so any move to remove tax on investing is likely to provoke a major backlash.

There is also the point that the FTSE 100 is trading at near-record levels under the current tax regime.

Either way, investors would be well advised not to count their savings just yet. Earlier this year, the possibility of raising the level of tax on dividends and/or removing the allowance that sees taxpayers only pay tax on dividend income above £500 was floated – and with talk of a public finance gap in the tens of billions, nothing is off the table.

Crypto Rules – Okay?

The European Fund and Asset Management Association (EFAMA) has set out its case for reform of the digital assets framework to fast-track improvements in EU capital markets.

The association reckons Distributed ledger technologies (DLT) can provide a solution to challenges such as fragmented post-trade infrastructures, lack of competition and cross-border flows among financial market infrastructures and national differences in securities, taxation and insolvency laws.

A sense of frustration is understandable. The EU’s DLT pilot regime is coming on for three and a half years old but over that time just three infrastructures have been granted permission to operate DLT trading and settlement systems, and only a handful of live transactions have been facilitated.

The obvious response from sceptics would be to suggest that this is indicative of a lack of interest from potential digital asset service providers. But this would be to ignore the reality that the regime has met with considerable resistance from those with a vested interest in maintaining existing capital market structures.

This is not to say that the scheme is perfect. The European Commission has not effectively communicated its scale, leading some potential market participants to assume that it was a fixed term project that would be superseded over a relatively short timeframe or that the volume cap might not be removed.

ESMA has pointed to the failure to support e-money tokens issued by e-money institutions as a further barrier. Any update to the regime should also enable settlement in euro-denominated stablecoins licensed under the Markets in Crypto-Assets Regulation, which would facilitate straightforward access to cash on-chain and significantly boost the European stablecoin market in its fight for relevance against cryptocurrencies pegged to the US dollar.

Tanguy Van de Werve, EFAMA director general observes that many European firms have made significant investments in DLT and that these efforts should be matched with a clear commitment from EU authorities to deliver on a DLT-based ecosystem.

Piecemeal changes - weighed down by lengthy legislative processes - will not give the market the necessary signals for further investments.

DATs Not What Retail Investors Expected

In a recent LinkedIn post, Anton Golub, chief business officer at Freedx outlined how retail investors have lost around $17 billion by buying shares of digital asset treasuries or DATs - firms that explicitly pursue a strategy of accumulating digital assets as a core function of their business (think Strategy or Metaplanet).

The problem is that these investors were not buying Bitcoin, the value of which has grown strongly this year. Instead, they acquired what he describes as ‘volatility arbitrage shells’.

DATs issue convertibles or fixed/moving-strike warrants that hedge funds buy at premium terms and short the stock to delta hedge, generating significant revenues. The DAT uses the proceeds to buy Bitcoin and retail investors buys the stock, thinking it is just leveraged Bitcoin.

But when volatility compresses, hedge funds lose interest and issuance dries up. Coin accumulation stops and market net asset value collapses. Metaplanet’s market cap fell from $8 billion to $3.1 billion despite holding $3.3 billion of Bitcoin.

As one crypto specialist put it, too many investors confuse Bitcoin exposure with exposure to leveraged structures built around the cryptocurrency and chase Bitcoin-linked instruments without realising they are stepping into a volatility trade.

There is also the question of why an investor would put money into a DAT to gain exposure to Bitcoin when there are plenty of exchange-traded funds that perform this task more efficiently.

The solution? Build the next generation of crypto-native public companies on transparency and genuine alignment with the underlying asset.

Source: Finance Magnates