ECB: Crypto-asset sector poses “risk to financial stability”

European Central Bank calls for immediate implementation of MiCA regulation

The European Central Bank (ECB) has warned of the dangers to European financial stability posed by the crypto-asset sector should it continue to grow at its current rate. 

In Decrypting financial stability risks in crypto-asset markets, the eurozone’s central bank stated: “The stellar growth, volatility and financial innovation currently seen in the crypto-asset ecosystem, as well as the rising involvement of institutional investors, show how important it is to gain a better understanding of the potential risks that crypto-assets could pose to financial stability if trends continue on this trajectory.”

Increasing crypto demand from institutional investors

The report, a part of the ECB’s bi-annual Financial Stability Review, recognised that while crypto asset markets still represent less than 1% of the global financial system, there is increasing demand from institutional investors in Europe. 

In 2020 only 45% of European institutional investors, according to a survey by Fidelity Digital Assets, indicated that they had some exposure to digital assets, said the ECB. Two years later this figure stood at 56%. 

This growing involvement of asset managers is largely a “response to demand from their own clients”, said the report. 

Concerns over lack of liquidity ‘shock absorbers’

The ECB also stressed its concern for the “lack of internal shock absorbers that could provide liquidity at times of stress” within the crypto asset market. It warned: “The wider involvement of financial institutions or the use of crypto-assets as a form of payment would increase the potential for spillover to the wider economy, particularly if leverage were employed.” 

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The solution encouraged by the central bank is the immediate implementation of the Markets in Crypto Asset Regulations (MiCA) legislation, which seeks to establish a clearer legal framework than that which currently exists. However, the report recognised that MiCA can only be implemented by 2024 at the earliest, by which point the crypto asset market will have been even further integrated into the broader economy. 

‘If trends continue, crypto poses stability risks’

As part of its conclusions, the ECB said: “The nature and scale of crypto-asset markets are evolving rapidly, and if current trends continue, crypto-assets will pose risks to financial stability.

“The challenges faced in monitoring financial stability risks from crypto-assets developments and interconnectedness with the traditional financial sector will persist as long as there are no standardised reporting or disclosure requirements.”

Last week, the central bank’s president, Christine Lagarde, said that cryptocurrencies were “worth nothing” and called for greater regulation to protect consumers.

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