In a report published today titled “Decrypting financial stability risks in crypto-asset markets,” part of the ECB’s twice-yearly Financial Stability Review, the European regulator emphasized the danger posed by the increasing integration of crypto with traditional finance.
“If the present trajectory of growth in the size and complexity of the crypto-asset ecosystem continues, and if financial institutions become increasingly involved with crypto-assets,” the report concludes, “then crypto-assets will pose a risk to financial stability.”
Though the report gives some attention to the current risks posed to individual crypto traders, it is far more preoccupied with a theoretical disaster scenario in which a crypto market crash, akin to what has transpired recently, triggers a comparable crash in traditional markets.
The report claims that such an event is possible if no changes are made to how crypto is currently regulated and integrated into the broader economy.
In such a vein, the report likens the crypto market to the subprime mortgage market responsible for tanking the global economy in 2008.
“Despite recent declines, they [cryptocurrencies] remain similar in size to, for example, the securitized sub-prime mortgage markets that triggered the global financial crisis of 2007-08,” the report reads.
ECB’s vision of crypto
One of the primary ways crypto could become further integrated with the traditional economy and thus increase the risk of disaster, according to the report, is via the widespread adoption of crypto by financial institutions or as an accepted payment method.
Per the report, these integrations “would increase the potential for spillover to the wider economy, particularly if leverage were employed.”
Complicating the matter further is that these adoptions anywhere, not just in the EU, could trigger a global financial meltdown. “As this is a global market and therefore a global issue,” the report conceded, “global coordination of regulatory measures is necessary.”
Such adoption, though, is already well on its way.
Just last month, Fidelity, America’s largest provider of 401(k) savings accounts, announced that it would begin allowing workers to save up to 20% of their retirement in Bitcoin. Yesterday, Balenciaga became the latest fashion label to permit online and in-store payment with cryptocurrency.
To mitigate these developments, the ECB report urged the EU to immediately implement its’ recently-passed Markets in Crypto Asset Regulation (MiCA) legislation, which aims to create a legal framework for regulating crypto within the EU.
The report notes that such regulations couldn’t be implemented until 2024 when the crypto market will likely be further integrated into the broader economy.
However, what those laws will look like remains to be seen. Other countries, including the United States, have struggled to reconcile the perceived need for oversight with the inherently decentralized nature of the crypto market.
To this end, the ECB did not offer specific legislative solutions, only caution: “The challenges [regarding crypto]… will persist as long as there are no standardized reporting or disclosure requirements.”
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