EU Watchdog: Crypto Leverage Only an Issue for Traditional Finance

EU Watchdog: Crypto Leverage Only an Issue for Traditional Finance


A new report from the European Systemic Risk Board recommends policy options for better monitoring the crypto sector and mitigating any risks, particularly in relation to leveraged trading and the importance of coordination and cooperation between Europe and countries abroad.

Cryptocurrency contagion danger is low today, but a European watchdog is keen to keep it that way.

A new report from the European Systemic Danger Board (ESRB) found that the industry’s economic impact is minimal, but recommends policy options that would allow EU bodies to better monitor the cryptocurrency sector and mitigate any risks.

Between other suggestions, such as actively monitoring contagion and education, the ESRB likewise highlighted the importance of monitoring leveraged trading in the cryptocurrency industry.

“Leverage in the crypto- investment world is only a challenge if there are connections with the traditional financial system—something that has to  be monitored,” it read.

Assessing the state of cryptocurrency trading in Europe today, the European watchdog’s report likewise implies that “coordination and cooperation” betwixt Europe and countries abroad is important to ensuring that this economic impact does indeed stay low. This is owing to the “cross-border nature” of digital currencies, stated the ESRB.

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It’s expected to generate further discussion around the matter, in particular  how to secure that the  dangers related to the interconnection of cryptocurrency and traditional finance remain low.

“The approach should be to further monitor the situation and not implement strict policies preemptively, in particular  as the danger for banks from direct exposure to crypto-assets has already been limited by the Basel Committee’s mandate that crypto-assets other than tokenized RWAs and stablecoins should have a danger weight of 1,250%, which effectively requires banks to back these assets 1:1 with the bank’s regulatory capital,” partner and chief legal officer at Europe-based financing company Greenfield Financial resources Christian Zimmermann informed Decrypt.

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Last December, the Basel Committee introduced a suite of banking standards for institutions looking to win access to digital currencies, some of which were likewise adopted by the European Parliament’s Economics and Monetary Affairs Committee in January.

The report may likewise inform a future review of Europe’s landmark Markets in Cryptocurrency Assets (MiCA) regulatory framework, which set a unified standard for cryptocurrency investment regulation across EU member states.

Regulatory bodies in the EU have been watching cryptocurrency markets and Decentralized Finance closely following a turbulent period for the industry.

In the last 18 months, a bear market brought down the price of Bitcoin (BTC) by 77%, Luna’s primary developer was arrested in Montenegro on fraud charges, and the implosion of FTX Trading Ltd caused a crisis of faith for numerous investors and customers.

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