European market surveillance authority sees crypto as a danger

The European Securities and Markets Authority (ESMA) warns investors in a recent report “Crypto Assets and their Risks to Financial Stability” from the potential dangers of merging the crypto and traditional financial markets.

Due to their volatile growth cycles and as long as no relevant regulations are in place, crypto assets pose numerous risks that could become relevant for financial stability in the future

ESMA

The growing overlap between the two markets requires increased monitoring and regulatory oversight, it said. In addition to the volatility of the market and the risk of leveraged positions, the report gives a recommendation for action.

ESMA’s criticism

To start, the agency notes that the crypto market would “become increasingly similar to traditional financial markets and infrastructure.” Growing awareness among crypto investors has been clouded by deteriorating macroeconomic conditions. “Rising inflation and the end of the low-interest-rate era have eroded previously optimistic investor sentiment and caused a dramatic sell-off in the crypto-asset market,” the report states.

The report also refers to the hype phase of 2021, which brought many investors into the market. The ESMA also deals with the current developments on the crypto market and addresses the collapse of the Terra stablecoin, which the market supervisory authority ultimately sees as responsible for the crash of the crypto market.

Fear of adoption and leverage trading

“There are multiple transmission channels between the crypto market and the traditional financial system,” it continues. In this context, the supervisory authority consults a study from April. The result of the survey at that time: 90 European investment funds are involved with direct investments in the crypto sector. Twenty others wanted to profit indirectly, via derivatives.

The ESMA seems to be concerned about the increasing interdependence of the classic financial market with the crypto market. Best example: Tesla. In 2021, it was first said that the Californian company’s cars could be bought using Bitcoin. The e-car manufacturer then backed away from the decision. In both communications, Musk significantly influenced the Bitcoin price.

By the way: In the new BTC-ECHO Magazine you can read the whole story behind the ambivalent relationship between Tesla and Bitcoin.

In addition, ESMA officials are concerned about “investment opportunities that are too risky”. Exchanges such as Huobi or Bybit now allow their investors to trade cryptocurrencies with leverage of up to 125 times – this quickly leads to a total loss.

ESMA sees a need for action on regulation

With the MiCA regulation, the EU is the first major jurisdiction in the world to provide a comprehensive, dedicated regulatory framework for crypto assets. This will give ESMA new powers to decide exactly what needs to be included in the white papers of newly issued assets.

Outside of Europe, too, attempts are being made to contain crypto-related financial market risks. The Howey test is intended to be used in the USA to decide whether cryptocurrencies are regulated as commodities or securities. There is a heated discussion as to which area of ​​responsibility crypto assets fall under. Most recently, the SEC claimed that Ethereum blockchain transactions would be entirely under US jurisdiction. BTC-ECHO reported.

ESMA wants to get help with regulation from other authorities, such as the Financial Stability Board (FSB): “The cross-border nature of the crypto-asset market should not be underestimated.”

Crypto market of limited relevance

According to the report, even at its peak, the crypto market was worth just 1 percent of the combined market capitalization of stock and bond assets. This is an indicator of “limited relevance for financial stability.” Nor would the turmoil in the crypto asset market spill over into traditional financial markets or the real economy.