EU Risk Board Flags Crypto as Systemic Threat

EU Risk Board Flags Crypto as Systemic Threat

The European Systemic Risk Board warns that the unchecked growth of the crypto markets could pose a systemic risk and calls for greater oversight of “contagion channels.”

  • The cryptocurrency markets have grown significantly in the past decade.
  • The ESRB has warned that the unchecked growth of the nascent market could pose a systemic risk.
  • The agency has was known for greater oversight of “contagion channels.”

The cryptocurrency markets have grown significantly in the past decade from a total market capitalization of approximately $1.5 Billion in May 2013 to nearly $3 trillion in November 2021. The metric sits at about $1.11 trillion per CoinMarketCap data at the time of publication owing to the bear market rout.

With this growth, the industry has evolved increasingly intertwined with the traditional finance sector. The European Systemic Danger Board has now warned that the cryptocurrency markets could pose a danger to financial stability if allowed to grow unchecked.

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ESRB Calls for Greater Supervision of “Contagion Channels”

In a report released on Thursday, May 25, the ESRB pointed out that regardless of a turbulent year for the nascent market in the past year, there had been little impact on the traditional financial system. 

Reports by the agency, on the other hand, the lack of a cascading effect is owing to the few ties betwixt the traditional financial sector and the cryptocurrency markets. With greater interconnectedness betwixt traditional finance and cryptocurrency markets, the ESRB believes the truth may be different. 

"Given the exponential growth and high volatility of  cryptocurrencies, they must to be closely monitored as they may come to pose systemic  dangers. These  dangers could materialise if,  for instance, interconnectedness with the traditional financial system increases over time, new connections are not promptly identified, or if   similar innovations – such as distributed ledger technology – are  likewise broadly adopted in traditional finance," the ESRB wrote in a press statement.

The board has was known for greater monitoring of “contagion channels” betwixt the traditional financial sector and cryptocurrency markets and within the cryptocurrency markets. Suggestions from the ESRB include standardized disclosure requirements for banks and financing funds with cryptocurrency exposure, suggesting the same for crypto stablecoin issuers. Other concerns cited by the ESRB included conflicts within large cryptocurrency corporations that offer numerous services, leveraged trading, and cryptocurrency staking and lending.

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The European Union is it’s worth noting that already taking steps to regulate the nascent market with the Markets in Crypto-Assets bill, which passed the EU parliament vote the previous  30 days. In its current form, MiCA covers licensing requirements for cryptocurrency enterprises and crypto stablecoin issuers. The judicial system likewise covers anti-money laundering regulations. The ESRB’s latest suggestions would likely inform future modifications to the landmark regulatory framework.

The other side

  • The recommendations made by the ESRB are not binding.

Why This Matters

The ESRB’s suggestions indicate that the EU’s cryptocurrency regulations would evolve to cover more aspects of the industry.

Read this to learn more about the EU’s cryptocurrency regulatory framework:

The Terrifying Crypto Scenario That Could Rip America Apart

EU’s MiCA Cryptocurrency Regulations: What You Need To Know

The politicization of Bitcoin (BTC) continues  in the United States. Find out more:

DeSantis: Biden Administration Would Kill Bitcoin


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