As the cryptocurrency industry increases at an unprecedented pace and digital assets such as Bitcoin (BTC) and Ethereum (ETH) become increasingly prevalent as a result of investors abandoning fiat, major European authorities are concerned about the stability of conventional banking.
As stated in its October 4 study titled “Crypto-assets and their risks to financial stability,” one of the worried parties is the European Securities and Markets Authority (ESMA), which feels that crypto, because of its volatility and lack of regulation, poses several threats to financial stability.
As stated by the ESMA: “Due to their erratic growth cycles, and so long as necessary regulatory rules do not apply, crypto-assets imply significant risks that may become important to financial stability in the future.”
In the study, the regulator acknowledged that “currently, crypto-assets are still tiny in size and their interconnections with conventional markets are restricted,” but that “this condition may change since market growth may occur abruptly and risk transfer is conceivable through several pathways.”
The regulator acknowledges that the volatility of the cryptocurrency market 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 conventional financial markets or the actual economy. Nonetheless, spillovers are possible, depending on how existing risks are controlled and how the interconnections between the two systems grow.”
For these reasons, the European Securities and Markets Authority (ESMA) emphasized the need for constant monitoring of the cryptocurrency industry and its connection with the broader financial system.
In the meanwhile, the ESMA is not the only financial regulator concerned about crypto’s impact on conventional financial institutions.
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