The European Systemic Danger Board has recommended increased disclosures and monitoring as measures to combat theย dangers associated with the digitalย currency market.
This alarm comesย after concerns have been raised about theย capacity impact of a sudden crisis in the cryptocurrency sector on the worldwide economy.
Findings span 77 pages
The European Systemic Danger Board (ESRB), an oversight body operating under the European Monetaryย Authority, released a comprehensive report on May 25, delving into the realm of cryptocurrency assets and decentralizedย financeย (DeFi).
Spanning 77 pages, the report emphasizes the rapid growth of the volatile cryptocurrency industry and its deepening integration with the traditional financial market.ย
Evenย though the shocks experienced by the cryptocurrency sector in 2022 did not cause wholeย lotย of harm to traditional finance (TradFi), the report argues that the existing danger monitoring system is inadequate in detecting potential concerning trends that may emerge in the future.
The report likewise outlines the financial stability danger posed by reserve-backed cryptoย stablecoins, which have connections to the traditional financial system owingย to their underlying assets in conventional fixed income instruments.
Inย contrastย toย regulated money market funds, these cryptoย stablecoins lack regulatory oversight, a clear judicialย system, and access to a lender of last resort. Transparency in their accounting practices likewise varies, raising concerns about the quality of reserves backing the tokens.ย
The ESRB goes on to state that previous shocks in the cryptocurrencyย market demonstrated a preference for moreย safe cryptoย stablecoin issuers, mentioning Tetherโsย (USDT) fluctuating market as an example.
Toย lower the likelihoodย of a run, the report points to the Unitedย States Presidentโs Working Group on Financial Markets report which proposed limiting the issuance of reserve-backed cryptoย stablecoins to chartered banks could transform them into traditional demand deposit liabilities.
This would subject the issuers to banking regulation, supervision, and deposit insurance, aligning them with theย present banking system and reducing the possibilityย of panic-induced runs.
By implementing these measures, the aim would effectively be to strengthen stability and instill greater confidence in the functioning of reserve-backed stablecoins.
Enhanced monitoring
Speakingย about the systemic significance of crypto- investment markets, the recently published report emphasizes the critical necessity for enhanced monitoring and evaluation of market developments.
Recognizing the evolving nature of these markets, the report underscores the importance of closely scrutinizing and assessing their dynamics to secure appropriate regulatory measures and safeguard financial stability.
This release comes just one 30ย days after the approval of MiCa, the 1st regulatory framework of its kind across the globe.
