Crypto-Assets Impact on Traditional Markets Is Small, But Can Pose Systemic Risk: EU Watchdog

DeFi EU Regulation

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Sarah Wynn

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June 25, 2023

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Europe’s financial overseer does not seem overly concerned about cryptocurrencies’ impact on the financial system, but still said regulators should monitor risks in case. 

The European Systemic Risk Board released a report on Thursday titled “Crypto-assets and decentralised finance- systemic implications and policy options.”

“Even though the crypto-asset sector might not be systemic today, authorities should be able to understand the developments of the sector and their potential implications for financial stability,” the board said in the report. 

The market capitalization of crypto-assets “appears fairly small,” the board said.

The reported market capitalization for the assets, including stablecoins and for bitcoin where private keys are thought to be lost, amount to about 0.8% of the EU financial sector, according to the report. 

That is about the size of Amazon or the size of the 15th largest bank in the European Union, the board said. 

Decentralized finance, or DeFi makes up a small portion, so has no “significant connect yet to traditional finance,” according to the report. 

If crypto does enter traditional finance…

The board also looked into how the crypto market could become “systemically relevant.”

“There are various instances in which crypto-assets could pose a systemic risk, for example if (i) their interconnectedness with the traditional financial system increases over time, (ii) their connections to the traditional financial system are not identified before they cause problems, and (iii) similar technologies are adopted in traditional finance,” the board said. 

The board made a few recommendations including improving the EU’s ability to monitor through certain reporting requirements and having a clear understanding of crypto staking and lending. 

“A greater degree of understanding of developments in DeFi and the implications for regulation and supervision should be pursued in the future. More specifically, it would be useful to investigate governance arrangements to ensure a consistent application of regulation to these services,” the board said.