EU watchdog cautions on cryptocurrencys potential threat to financial stability

EU watchdog cautions on cryptocurrencys potential threat to financial stability

European Union watchdog urges ban on leveraged bets for crypto assets to prevent financial instability and suggests implementing new regulations and periodic reporting for organizations working with crypto assets in a recent report.

On Thursday, May 25, a European Union watchdog urged EU authorities to ban leveraged bets on cryptocurrency assets by establishing limitations for financing funds, digital currency exchanges, and other enterprises to prevent shocks in that market from endangering financial stability elsewhere.

It was one of the European Systemic Danger Board’s (ERSB) numerous suggestions, which likewise included requiring periodic reporting from all organizations working with cryptocurrency assets and instituting new regulations for the industry’s major enterprises in its report.

It comes after a difficult 18 months for the sector, during which Bitcoin’s price plunged over 70%, the digital currency Luna collapsed, and the exchange FTX Trading Ltd went from purchasing Super Bowl commercials to filing for bankruptcy.

The ESRB stated in a report: “Systemic dangers could arise quickly and suddenly. If the rapid growth trends observed in recent years were to continue, crypto-assets could pose dangers to financial stability.”

Curbing cryptocurrency leverage limits

The ESRB likewise advocated “introducing leverage limitations for financing funds exposed to crypto-assets” as a revision to a law that was only recently enacted by the EU.

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It likewise recommended increasing the amount of collateral that must be provided for distributed finance products and crypto stablecoins, likewise as restricting the  potential of digital currency corporations to lend crypto tokens to their customers, which is one method by which leveraged bets could be made.

Despite the fact that the ESRB’s suggestions do not have any legal weight, it is potential that they will be taken into consideration as the EU works on fresh iterations of its markets in Markets in Cryptocurrency Assets Regulation (MiCA). 

The latest information comes after Finbold’s report past week, which revealed the EU Council had adopted regulations to collect cryptocurrency transaction data to give tax authorities.

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