EU Regulatory Body Highlights Risk Associated with Banks that Run on Stablecoins

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Key takeaways:

  • The European Central Bank’s regulatory authority released its assessment of cryptocurrency assets and decentralized finance.
  • Despite the impending adoption of legislation, ESMA cautioned financial businesses that cryptocurrency would continue to be unregulated in most nations.

The risks presented by a sudden collapse in the former are growing as the crypto industry continues to forge symbiotic relationships with traditional banking. It is the viewpoint of the European Systemic Risk Board (ESRB), which urges increased oversight of the market for digital assets. 

The European Central Bank’s regulatory authority, the ESRB, released its assessment on cryptocurrency assets and decentralized finance (DeFi) on May 25. The 77-page report’s core argument is that the volatile cryptocurrency market is expanding and becoming more intertwined with traditional financial markets. Even though the 2022 crypto shocks didn’t do as much harm in TradFi, the framework in place to manage risks is insufficient to keep an eye on worrying trends in the years to come.

The ESRB suggests enhancing the European Union’s ability to monitor the cryptocurrency market and the pathways that connect it to the more significant financial sector. The research indicates that the EU should encourage standardized disclosure reporting from banks and investment institutions that deal with cryptocurrencies.

Stablecoins are given particular emphasis in the report. One of the dangerous, speculative situations it mentions is a “run on a reserve-backed stablecoin.” This makes sense, considering stablecoin reserves might comprise stocks, bonds, fiat currencies, and other traditional public and private assets. 

The ESRB raises the issue of stablecoins’ lack of transparency and uses Tether as an illustration. Tether has a market cap of $83 billion despite having few facts available about its reserves.

In a separate announcement, the European Securities and Markets Authority (ESMA) singled out cryptocurrency assets and reminded businesses that, despite regulation being on the way to adoption, most countries will not yet have laws governing cryptocurrency. ESMA stated:

“Specifically on crypto assets, while the Markets in Crypto-Assets Regulation (MiCA) is close to adoption, crypto assets offered by investment firms will continue to be unregulated in most jurisdictions until MiCA applies.”

The non-regulated product and service offerings raised issues for ESMA. These involve hazards to investor protection, according to the regulator. The financial watchdog also thinks that clients may be misled about the level of protection they receive.

In a statement, the financial watchdog of the EU urged investment firms to make sure that their customers were aware of the regulatory status of the products they were promoting. According to ESMA’s recommendation, investment firms should take steps to ensure that their clients are informed of the regulatory status of the products they are investing in to reduce these risks.

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