As the cryptocurrency market expands at an unprecedented rate and digital assets such as Bitcoin (BTC) and Ethereum (ETH) become more prevalent due to investors abandoning fiat, major European regulators are concerned about the stability of traditional finance.
As expressed in its October 4 report titled “Crypto-assets and their risks to financial stability,” the European Securities and Markets Authority (ESMA) is one of the concerned parties. The ESMA believes that crypto poses numerous risks to financial stability due to its volatility and lack of regulation.
As stated by the ESMA:
“Due to their volatile growth cycles, and as long as relevant regulatory provisions do not apply, crypto-assets entail numerous risks which may in future become relevant for financial stability.”
Market capitalisation chart for cryptos in billions of EUR. Source: ESMA report
Need for constant oversight
In the study, the regulator acknowledged that crypto-assets are currently tiny, and their interconnections with traditional markets are restricted. Still, this condition may change since market growth may occur abruptly. Risk transfer is conceivable via several pathways.
The regulator acknowledges that the cryptocurrency market’s volatility has not yet spread to conventional finance but warns that this risk should not be discounted.
Until recently, instability in the crypto-assets market (most of which may be traced to intrinsic flaws in the market structure and underlying technology) has not spread to traditional financial markets or the actual economy.
Nonetheless, spillovers are possible, depending on how current risks are contained and how the interconnections between the two systems develop.
For these reasons, the European Securities and Markets Authority (ESMA) emphasised the need to constantly monitor the cryptocurrency industry and its connection with the broader financial system.
Other authorities’ worries about crypto
Meanwhile, the ESMA is not the only financial regulator concerned about crypto’s impact on traditional financial institutions.
Christine Lagarde, president of the European Central Bank (ECB), has voiced concern that the expansion of cryptocurrencies might threaten the existing banking system.
Michelle W. Bowman, the governor of the Federal Reserve of the United States, has highlighted concerns about several cryptocurrency-related issues that, according to her, pose hazards for the banking industry and raise doubts about their regulatory prospects.