- The crypto 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 called for greater oversight of “contagion channels.”
The crypto markets have grown significantly in the past decade from a total market cap 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 writing due to the bear market rout.
With this growth, the industry has become increasingly intertwined with the traditional finance sector. The European Systemic Risk Board has now warned that the crypto markets could pose a risk to financial stability if allowed to grow unchecked.
ESRB Calls for Greater Supervision of “Contagion Channels”
In a report released on Thursday, May 25, the ESRB noted that despite a turbulent year for the nascent market in the past year, there had been little impact on the traditional financial system.
According to the agency, however, the lack of a domino effect is due to the few ties between the traditional financial sector and the crypto markets. With greater interconnectedness between traditional finance and crypto markets, the ESRB believes the reality could be different.
"Given the exponential growth and high volatility of cryptos, they need to be closely monitored as they may come to pose systemic risks. These risks could materialise if, for example, 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 also widely adopted in traditional finance," the ESRB wrote in a press statement.
The board has called for greater monitoring of “contagion channels” between the traditional financial sector and crypto markets and within the crypto markets. Suggestions from the ESRB include standardized disclosure requirements for banks and investment funds with crypto exposure, suggesting the same for stablecoin issuers. Other concerns cited by the ESRB included conflicts within large crypto companies that offer multiple services, leveraged trading, and crypto staking and lending.
The European Union is notably already taking steps to regulate the nascent market with the Markets in Crypto-Assets bill, which passed the EU parliament vote last month. In its current form, MiCA covers licensing requirements for crypto businesses and stablecoin issuers. The legal framework also covers anti-money laundering rules. The ESRB’s latest suggestions would likely inform future modifications to the landmark regulatory framework.
On the Flipside
- The recommendations made by the ESRB are not binding.
Why This Matters
The ESRB’s suggestions indicate that the EU’s crypto regulations would evolve to cover more aspects of the industry.
Read this to learn more about the EU’s crypto regulatory framework:
EU’s MiCA Crypto Regulations: What You Need To Know
The politicization of Bitcoin continues in the United States. Find out more: