EU watchdog does not deem crypto link to TradFi ‘significant’ to pose systemic risk yet

The European Systemic Risk Board (ESRB) said the current links between the cryptocurrency sector and the traditional financial sector are “not material” and therefore pose no systemic risk to the real economy at this time.

The ESRB issued a statement in it. Latest report On the “systemic impact” of cryptocurrencies and policy options to address them.

‘Not yet structured’

The ESRB report said that the total cryptocurrency market capitalization represents a tiny fraction of the traditional financial sector and shocks in this sector do not tend to spill over outside the cryptocurrency industry.

The market cap of Italy-based UniCredit (the 15th largest bank in the EU) or one FAANG company (Amazon) is roughly the same as the market cap of all cryptocurrencies and stablecoins combined.

According to the ESRB:

“that [the report] conclude that [crypto] This sector is not yet structured. “

The regulator added that the Financial Stability Board and other international regulators supported its findings.

However, the watchdog also said this could change soon, given the “exponential” growth of the cryptocurrency industry and its trademark high volatility.

imminent risk

The ESRB said that as the crypto sector becomes more “interlocked” with the traditional financial system, there will inevitably be more risks to the real economy.

Moreover, the increased penetration of distributed ledger technology, or similar innovations in the financial sector, could pose a range of systemic risks to financial stability.

The ESRB called on relevant regulators to stay vigilant and continue to improve their monitoring tools for the sector to prevent the impact of the crypto industry from spilling over into the wider financial system.

According to the report, standardized reporting and disclosure requirements for financial institutions (such as banks and investment funds) exposed to cryptocurrencies, stablecoin issuers, e-wallet service providers, etc. will help regulators It is said to help monitor and identify infection routes.

The ESRB also recommended placing limits on leveraged trading in the cryptocurrency sector, especially for investment funds. The report said that leveraged trading is an area that can rapidly systematize and cause contagion if not properly supervised, especially for leverage obtained through the traditional financial system.

Additionally, the ESRB said that crypto lending activities – the main area of ​​influence within the crypto sector – are outside the scope of MiCA regulations, requiring a new comprehensive regulatory framework to oversee them. Stated.

Regulators say one way to address the risk is to limit lending to cryptocurrency companies and increase collateral requirements for DeFi products.

Although post-EU watchdogs do not consider the cryptocurrency link to TradFi to be “substantial” enough to pose systemic risk, it first appeared on CryptoSlate.