European Securities and Markets Authority Blames Crypto For Financial Instability

European Securities and Markets Authority (ESMA) in a paper on Tuesday warned investors that crypto assets are highly risky and may bring financial instability in the future. The ESMA asserts growing links between crypto and traditional markets need increased monitoring and regulatory oversight. The paper shows how European Union officials see risks in the crypto market amid the MiCA regulatory framework adoption.

European Securities and Markets Authority Outlines Risks in the Crypto Market

The European Securities and Markets Authority (ESMA) released a paper titled “Crypto-assets and their risks
for financial stability” on October 4. According to the paper, crypto assets risk massive losses for investors and companies. The growing relationship between the crypto market and the traditional market is a concern for regulators globally.

ESMA believes that the interlinkages between crypto and traditional markets are limited now, but cryptocurrencies can pose risks of financial instability in traditional markets in the future. With many consumer-focused firms such as Tesla accepting Bitcoin for payments increases risk in the traditional market.

“Imagining a scenario in which a large retailer would enable crypto-assets as a payment option, or a leading tech company would introduce crypto-asset based peer-to-peer payments, consumer exposure could soar in a short period of time, strengthening the link between both systems.”

The paper cites crypto-asset retail and institutional investors as direct exposure and derivatives, funds, and exchange-traded products (ETPs) as indirect exposure to cryptocurrencies. Moreover, it says stablecoins, decentralized finance (DeFi), and crypto exchanges are channels of risk transmission to traditional financial
markets.

Moreover, it cites a European Supervisory Authorities survey revealing around 90 Europe-based investment funds are directly exposed to physical crypto-assets. The studies are part of preparing the officials for the MiCA law that takes effect in 2024.

EU Plans Digital Euro Legislation in 2023

While European Union prepares for the MiCA regulatory framework for crypto assets regulation, the EU is also looking to introduce Digital Euro. EU Commissioner Mairead McGuinness earlier confirmed proposing the legislation for the issuance of a digital euro by the ECB in early 2023. It will help address the disintermediation risk of banks and financial stability risks.