• The European Systemic Risk Board (ESRB) has warned that unchecked growth in the crypto markets could pose a systemic risk.
• The agency has called for greater oversight of “contagion channels” between traditional finance and crypto markets, as well as within the crypto markets.
• Suggestions include standardized disclosure requirements for banks and investment funds with crypto exposure, as well as stablecoin issuers.
Risk Alert from ESRB
The European Systemic Risk Board (ESRB) has warned that the unchecked growth of the nascent cryptocurrency market could pose a systemic risk. The agency has called for greater oversight of “contagion channels” to ensure financial stability.
Crypto Market Growth
The cryptocurrency markets have grown significantly in the past decade from a total market cap of approximately $1.5 billion in May 2013 to nearly $3 trillion in November 2021. At present, CoinMarketCap data puts it at around $1.11 trillion due to bear market routs. The industry is becoming increasingly intertwined with traditional finance which carries its own risks if left unchecked or unmonitored.
Increased Supervision Needed
The ESRB believes that if interconnectedness between traditional finance and crypto markets increases over time without proper monitoring, new risks could arise not previously seen before now. To prevent this, they suggest increased supervision of possible contagion channels between both sectors, including those within the crypto space itself such as leveraged trading and staking/lending services provided by large companies.
Standardized Disclosure Requirements
To help mitigate these risks, standardized disclosure requirements should be implemented for banks and investment funds with crypto exposure along with stablecoin issuers too if necessary. This would provide greater transparency into any potential contagion channels between both sectors that may be overlooked otherwise which could lead to greater financial stability overall in the future when these investments become more commonplace or popular investments amongst consumers worldwide .
The EU is already taking steps towards regulating cryptocurrencies with proposed legislation such as Markets in Crypto-Assets Regulation (MiCA). These regulations are intended to bring clarity and protect investors while maintaining an open environment for innovation at the same time; something which will need continued monitoring by regulatory bodies like ESRB going forward if this sector is to continue growing safely without creating any unforeseen risks down the line .