The European Systemic Risk Board (ESRB) said the crypto sector poses no systemic risks to the real economy for now, as current ties to the traditional financial sector are not “significant”.
The ESRB made the statement in its latest report on the “systemic implications” of crypto and the policy options for dealing with it.
‘Not yet systemic’
The ESRB report said that the entire crypto market cap is equivalent to a very small fraction of the traditional financial sector and that industry shocks are not susceptible to contagion outside the crypto industry.
The market capitalization of Italy-based UniCredit – the EU’s 15th largest bank – or the market capitalization of a single FAANG company – Amazon – is roughly the same as that of all cryptocurrencies and stablecoins combined.
According to the ESRB:
“It [the report] concludes that the [crypto] sector is not yet systemic.”
The regulator added that the Financial Stability Board and other international regulatory bodies support its findings.
However, the watchdog also said that could change soon given the crypto industry’s “exponential” growth and characteristic high volatility.
Risks on the horizon
The ESRB said that as the crypto sector becomes more closely “intertwined” with the traditional financial system, it will inevitably lead to more risk to the real economy.
Moreover, the increased penetration of distributed ledger technology – or similar innovations – in the financial sector may also give rise to various systemic risks to financial stability.
The ESRB urged the relevant regulators to remain vigilant and continue to improve their industry monitoring tools to ensure that any shocks to the crypto industry do not spread to the wider financial system.
According to the report, standardized reporting and disclosure requirements for financial institutions — such as banks and investment funds — exposed to crypto, stablecoin issuers and e-wallet service providers will help regulators monitor and identify potential contagion channels.
The ESRB also recommended setting limits on leveraged trading in the crypto sector, particularly for investment funds. The report said leveraged trading is an area that can quickly become systemic and contagious if not properly monitored, especially for leverage obtained through the traditional financial system.
In addition, the ESRB said that crypto-asset lending activities – the main area that provides leverage within the crypto sector – are not subject to MiCA regulation and need a new comprehensive regulatory framework to oversee it.
According to the regulator, one way to deal with the risks is to limit crypto lending and increase collateral requirements for DeFi products.
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