The European Securities and Markets Authority (ESMA) warned on April 10 that the crypto markets are highly concentrated.
ESMA said concentration is a problem because a single asset or exchange failure could have a major impact on the crypto ecosystem.
According to the agency’s findings, market capitalizations and trading volumes are “significantly concentrated” in a small number of assets in the crypto market.
Bitcoin (BTC), Ethereum (ETH) and Tether (USDT) accounted for 74% of the crypto market capitalization in December 2023 and represented more than half of the 2023 annual trading volume.
Exchanges also showed concentrated trading volumes, as just 10 platforms handled 90% of trading. Binance alone accounted for around half of all trading volume, although its dominance had fallen to 40% by December 2023 and has steadily declined overall since December 2022.
ESMA warned that individual cryptocurrencies are strongly linked and exhibit strong price correlations with each other. Furthermore, it described a positive correlation between crypto and stocks, demonstrating the risk and lack of a stable relationship with gold.
The agency said it does not view crypto as an effective “safe haven” in light of its analysis.
The EU perspective
Specific findings are particularly relevant to the EU’s regulatory activities. Of the 20% to 30% of crypto transactions involving fiat, 80% involved the US dollar or South Korean won. The euro played a “minor role” and was responsible for about 10% of fiat transactions.
The euro’s involvement in fiat crypto transactions did not increase even after the EU adopted the Markets in Crypto-Assets (MiCA) regulations in June 2023. However, ESMA said MiCA rules “could provide a potential growth driver” when implemented this year.
Exchange location is another problem. Although 55% of transactions took place on exchanges with an EU Virtual Asset Service Provider (VASP) license, many of the same transactions took place outside the EU. About half of crypto trading volumes take place on exchanges located in tax havens, while trading volume on European exchanges is virtually non-existent.
ESMA said MiCA will address location-related issues through disclosure requirements, improving transparency even as crypto exchanges expand into new jurisdictions.
The agency said its research broadly “supports the implementation” of MiCA.
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