ECB warns crypto markets pose financial stability risks
Jul 12, 2022
Frankfurt [Germany], July 12 : The nature and scale of crypto markets are evolving rapidly, said the European Central Bank (ECB), adding that if the current trends continue, it will pose risks to financial stability.
Crypto-asset markets thus need to be effectively regulated and supervised, the ECB said in an article titled 'A deep dive into crypto financial risks: stablecoins, DeFi and climate transition risk'.
"Dislocations in markets where crypto-assets are used could have spillover effects on regulated financial markets in the absence of timely regulatory intervention. The cross-border and global nature of the ever-growing crypto-asset universe calls for a holistic and coordinated approach among authorities," the ECB said.
The explosive growth of such assets since the end of 2020 and increasing interlinkages with other parts of the financial system have led to an ongoing global policy debate about the relevance and risks of crypto-assets for the financial system, it added.
While major unregulated crypto-assets such as bitcoin and ether continue to be the most popular such assets in the crypto universe, other types of crypto-asset have emerged and expanded considerably over the last two years adding to more complexity and new functionality within the crypto-asset ecosystem, it said.
"Stablecoins, for example, have created further interlinkages by serving as collateral in crypto-asset derivative transactions or as liquidity providers in DeFi. At the same time, interlinkages between the crypto-asset ecosystem and the traditional financial system have grown due to increasing institutional interest," it added.
Further, it said that while governments are primarily responsible for policy, financial institutions and prudential stakeholders also have a role to play.
It is important to note that the cryptocurrency market has been going through a turbulent phase.
The price of Bitcoin has dropped by as much as 75 per cent from its all-time high over the past seven months, and it has declined almost 60 per cent in the three months since April. Most other prominent crypto-assets have experienced even steeper declines over the same period.
