EU regulator writes report on crypto risk for financial stability

The European Securities and Markets Authority has just published a report on the perceived risks to financial stability posed by crypto.

The European Securities and Markets Authority (ESMA) is the European regulatory agency that oversees the securities market. In its report on crypto it analyses what it sees as the risks to financial stability, and the interlinkages with the traditional market that could lead to these risks.

Just like with all reports by traditional financial organisations and agencies, this report puts crypto in a bad light, mentioning the usual risk of “volatility”, and repeating the statements made by leading financial luminaries that “many crypto-assets have no tangible value”.

The report talks of “aggressive marketing campaigns aimed at the public” and particularly at “less sophisticated retail investors”. The report highlighted the high leverage present in the crypto market, network congestion, and rehypothecation among various other issues.

The report then moves on to the “risk transmission channels” that exist between both traditional finance and crypto markets. A recent survey by the European Supervisory Authorities is referred to, and it is pointed out that around 90 Europe-based investment funds have direct exposure to crypto-assets, while a further 20 have indirect exposure through crypto derivatives etc.

Stablecoins are given particular interest in the report, with doubts shed on the existence of reserve assets, and whether they are sufficient to back the stablecoins one to one. 

Finally the report concludes by holding up the forthcoming MiCA regulations as containing a “comprehensive, dedicated regulatory framework for crypto-assets”, and it also lauds the importance of the Financial Stability Board, and the International Organisation of Securities Commissions.

Opinion

It is to be wondered that so much effort has gone into trying to find the vulnerabilities in the crypto sector without once mentioning that most of these vulnerabilities can be found in the usage of fiat currencies.

The main theme of the report is financial stability and it could only be imagined the size and scope of a report on stability in the existing financial system. 

Whether the financial authorities want to admit it or not, a lot of ground-breaking innovations have come out of the crypto sector, and this process should be allowed to continue if it means that a solution is found to replace our archaic and corrupt financial system.

Two sides of the SEC

Hester Peirce of the Securities and Exchange Commission (SEC) was spot on when she suggested a Safe Harbour Proposal which would have given crypto projects a grace period of three years within which to prove themselves and to further build upon their innovations.

However, Gary Gensler, Chairman of the SEC is seen as particularly anti-crypto, and Peirce’s proposal was never taken up by the agency, as Gensler appeared to prefer enforcement rather than constructive dialogue.

Can crypto survive regulation?

Facing reality, it does look like crypto is going to have to adapt to the huge waves of regulation that are incoming. As it stands, some of the regulation appears to be so burdensome that many crypto projects could just throw in the towel and give up.

On the other hand, such heavy and suppressive regulation can supply the incentive for crypto to accelerate the race into decentralisation where government agencies will have no jurisdiction, and where individuals can transact with smart contracts that have no central organisation behind them.

Whatever happens, the next two to three years are going to be crunch time for both the legacy financial system and for crypto. For the existing financial system it will be about warding off financial meltdown, and for crypto it will be about surviving long enough to provide new systems that could govern a new monetary system.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.