Lending markets

Crypto Markets May Pose Risks to Broader Financial Stability, ECB Warns

A representation of Bitcoin virtual currency and small figurines are placed on the computer’s motherboard in this illustration taken January 7, 2021. REUTERS/Dado Ruvic/File Photo

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FRANKFURT, May 24 (Reuters) – Cryptocurrencies will pose a risk to financial stability if the emerging sector maintains its rapid growth of the past two years and financial firms step up their involvement, the European Central Bank (ECB) said on Tuesday. .

The crypto market fell sharply this month after leading stablecoin terraUSD fell. The crash led to calls from the world’s top financial leaders for “swift and comprehensive” regulation of the sector. Read more

Cryptocurrencies – historically a niche asset favored by risk-hungry investors, have exploded in size during the COVID-19 pandemic. Institutional investors in particular have been drawn to claims that bitcoin acts as an inflation hedge and offers high returns in the face of low interest rates.

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The crypto sector hit a high of $2.9 trillion last November, up from less than $300 billion at the start of 2020. Yet bitcoin, the largest token, since November has fallen more than half, driving the value of the overall crypto market to around $1.2 trillion.

The ECB, in its biannual Financial Stability Review, said exposure to crypto by banks and other large-scale financial institutions could put capital at risk and harm investor confidence, lending and markets. financial.

“Systemic risk increases with the level of interconnectedness between crypto-assets and the traditional financial sector,” he said.

The high-leverage trading offered by crypto exchanges has seen investors borrow funds to buy greater exposure to crypto, also increasing financial stability risks, the ECB noted.

Additionally, data gaps in the industry also hamper financial risk assessment, he said, warning that releases from crypto exchanges and data aggregators should be treated with caution.

Retail investors, long at the heart of crypto trading, have also crowded in, the ECB noted.

One in ten eurozone households have purchased cryptos like bitcoin, its Consumer Expectations Survey, which conducted the poll in six countries.

The ECB said crypto was not suitable for most retail investors and urged European Union authorities to approve new rules on crypto assets “as a matter of urgency”.

The rules, first published in September 2020, have not yet been approved by the EU and are not expected to be approved until 2024 at the earliest, the ECB said.

($1 = 0.9376 euros)

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Reporting by Francesco Canepa in Frankfurt and Tom Wilson in London; edited by Matthew Lewis and Jason Neely

Our standards: The Thomson Reuters Trust Principles.