The European Central Bank (ECB) today published a report entitled “Decrypting financial stability risks in crypto-asset markets“, examining the risks associated with crypto and its potential to “spillover” into the wider economy.
In particular, the report noted that “systemic risk increases in line with the level of interconnectedness between crypto-assets and the traditional financial sector“.
While links between the traditional financial system had been relatively limited until recently, the ECB reported that interconnectedness with the wider financial system has been steadily growing.
According to the ECB’s report the main reasons for this include:
- Major payment networks increasing their support for crypto, making it easier for both the public and businesses to get some level of exposure to the asset class
- Greater institutional demand for Bitcoin and cryptocurrencies. For example, according to a survey by Fidelity Digital Assets, 56% of European institutional investors have some exposure to digital assets.
The ECB also highlighted the potential risks associated with the availability of leveraged crypto products, noting that the risk to financial stability could be amplified by the “growing options offered by crypto exchanges for investors to increase their exposure through leverage“.
We conclude that if the present trajectory of growth in the size and complexity of the crypto-asset ecosystem continues, and if financial institutions become increasingly involved with crypto-assets, then crypto-assets will pose a risk to financial stability.
European Central Bank Report May 2022, Decrypting financial stability risks in crypto-asset markets
The report concluded by recommending that the MiCA regulation (the EU’s legislative package on digital assets) be adopted “as a matter of urgency”.