The European Systemic Risk Board suggests more disclosures, more monitoring to fight the risks of the crypto market.
As the crypto industry continues to grow reciprocal connections with traditional finance, the risks posed by a sudden crisis of the former to the global economy are rising. Such is the opinion of the European Systemic Risk Board (ESRB), which calls for tightening the scrutiny of the digital assets market.
On May 25, the ESRB, an oversight body within the European Central Bank, published its report on crypto-assets and decentralized finance (DeFi). The main thesis of a 77-page document is that the volatile crypto industry is growing, and its interconnectedness with the mainstream financial market is increasing along. While the shocks of last year in crypto didn’t trigger the same amount of damage in TradFi, a current system of risk monitoring is insufficient to trace all the troubling tendencies in the years to come.
The ESRB proposes to improve the European Union’s capacity to monitor the crypto space and the channels between it and the larger finance market. To obtain it, the EU should promote standardized disclosure reporting from banks and investment funds dealing with crypto.
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The report draws special attention to stablecoins. The first of the speculative, risky scenarios it names is the “run on a reserve-backed stablecoin.” This is understandable, given that the stablecoins reserves may consist of sovereign and private bonds, shares, fiat currencies and other conventional assets. The ESRB notes the lack of transparency in regard to these assets, providing the example of Tether (USDT), whose market capitalization reached up to $83 billion, while the disclosure contained few details about its reserves.
Also noticed by the overseers is the lack of measures contained in the upcoming pan-EU Markets in Crypto-Assets (MiCA) legislation in regard to so-called “crypto-asset conglomerates.” In the ESRB definition, conglomerates are those crypto companies that run a number of different types of operations (for example, custody and trading) under one roof, such as Binance. Combining activities bears risks, and the watchdog urges regulators to “study” crypto-asset conglomerated. It should be noted that such recommendations are still way milder than the appeals to prosecute combined activity in crypto, characteristic to the United States regulators.
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