Europe’s Systemic Risk Board Raises Alarm Over Crypto and DeFi

Given the impressive growth trajectory and unpredictable future of crypto markets, the potential systemic risks cannot be dismissed, the board said

article-image

Alexandros Michailidis/Shutterstock modified by Blockworks

share

The European Systemic Risk Board (ESRB) said Thursday despite a volatile year for crypto, its effect on traditional financial systems has been minimal. Even so, the board still cautioned for further oversight.

This marks a slight shift in urgency, where the European Central Bank (ECB) has previously called for immediate regulations to curb systemic risks posed by crypto.

While European lawmakers eventually answered the call via the Markets in Crypto Assets or MiCA regulation in response in April — which set standards for stablecoin regulation and crypto oversight — more legwork is required, the ESRB said.

The ESRB is closely linked with the ECB, providing secretarial and logistical support with the bank’s president, Christine Lagarde, serving as the board’s chair.

In a report published Wednesday, the financial watchdog stressed the need for continued surveillance, namely around DeFi and smart contracts, which fall short of MiCA’s mandate.

Given the impressive growth trajectory and unpredictable future of crypto markets, the potential systemic risks cannot be dismissed, the report reads.

“These risks could materialize if, for example, interconnectedness with the traditional financial system increases over time,” it said.

For now crypto posed no such risks following a rout in the industry last year, the ESRB said.

Still, the report recommends policymakers implement several changes to quell existing regulatory concerns. Those include regular reporting requirements for financial institutions with crypto exposure. 

Gasper Stih, marketing director at ZondaCrypto, told Blockworks that while the report’s language and message differs somewhat from years past, the ESRB is maintaining a similar theme.

While the report attempts to give the impression of overarching systemic risk, it also acknowledges the DeFi market as being “very small.”

“This seems to indicate that any threat perceived by the ECB is one that only exists some way into the future, hinting at a possibility that the board may be underestimating the speed at which the crypto and DeFi market typically progresses,” Stih said.

A short-term fix

The ERCB stressed the need to identify and address systemic risks stemming from these areas, suggesting that the potential for prudential, reputational or operational risks could be magnified. 

As such, the ESRB recommended promoting EU-level knowledge exchange and monitoring of market developments. This includes a particular focus on operational resilience, DeFi and digital asset staking, and lending activity.

The intent, they say, is to identify, assess and mitigate potential risks to financial stability and the effectiveness of macroprudential policy. 

Though that shouldn’t be the only area of focus, Stih said.

“What’s more important going forward is a focus on reducing manipulation and exploitation of crypto and DeFi, as these remain key factors that continue to cause undue volatility in the market.”


Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.

Tags

Upcoming Events

Salt Lake City, UT

MON - TUES, OCT. 7 - 8, 2023

Blockworks and Bankless in collaboration with buidlbox are excited to announce the second installment of the Permissionless Hackathon – taking place October 7-8 in Salt Lake City, Utah. We’ve partnered with buidlbox to bring together the brightest minds in crypto for […]

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Research Report Cover Vertex.jpg

Research

The proliferation of new perp DEXs has led to fragmented liquidity across various DEXs and chains. Vertex, known for its vertically-integrated DEX that includes spot, perpetual, and integrated money markets, is now tackling cross-chain liquidity fragmentation through horizontal integration with the launch of new Edge instances. Vertex's integrated offerings and cross-margined account structure amplify the benefits of new instances: native cross-chain spot trading, optimized cross-chain basis trading, consistent interest rates, reduced bridging friction, and more.

article-image

I’ve come to the realization that more attention is needed to create and sculpt the digital spaces where we live

article-image

The NYSE went down yesterday after a glitch caused a string of erroneous trades. Does DeFi fix this?

article-image

Partnering with EtherFi and Angle, the fully on-chain perp DEX features bespoke collateral

article-image

Sponsored

Gavin Wood introduced the next evolutionary step for the Polkadot network: the Join-Accumulate Machine, or JAM

article-image

The side events were the places to be at Consensus 2024, according to attendees

article-image

Also, who’s come out swinging in the spot ether ETF fee war — and who could undercut them