Crypto Markets Are Warned by European Central Bank

Crypto Markets Are Warned by European Central Bank

Cryptocurrencies will create a situation of risk to financial stability if the sector maintains its rapid growth, the European Central Banki (ECB) said on Tuesday.

Cryptocurrencies will create a risk to financial stability if the emerging sector maintains its rapid growth of the previous two years and financial firms strengthen their involvement, the European Central Bank (ECB) said on Tuesday.

The crypto market declined sharply this month after the diving of the major “stablecoin” terraced. The crash is the main reason for the calls from the world’s top financial leaders for “smooth and easier” regulation of the sector.

Cryptocurrencies – historically an asset favored by risk-hungry investors, burst in size during the COVID-19 pandemic. Institutional investors especially were drawn by claims that bitcoin acts as a barrier against inflation and offers high returns in the face of low-interest rates.

The crypto sector reaches a peak of $2.9 trillion last November up from less than $300 billion at the start of 2020. Still, bitcoin, the biggest token, since November has fallen suddenly by over half, dragging the value of the overall crypto market down to around $1.2 trillion.

The ECB in its biannually financial stability review said exposure to crypto by banks and other financial institutions on a wide scale could put capital at risk and damage the investor’s confidence, lending, and financial markets.

“Systemic risk increases in a form of line with the level of interconnectedness between the crypto-assets and the ancestral financial sector,” it is said.

High leverage trading offered by crypto exchanges has seen investors borrow funds to buy greater exposure to crypto, also heightening the financial stability risks, as noted by ECB.

Furthermore, the shortage of data in the sector is also creating problems in the assessment of financial risks, it is said that warning the publications by crypto exchanges and data aggregators should be treated with care.

Retail investors, long at the heart of crypto trading, have also piled up in, the ECB as this was noted.

One in ten euro zone households has bought crypto such as bitcoin, its Consumer Expectation Survey, which formulated the poll in six countries.

The ECB said crypto was unsuitable for most retail investors and forced the  European Union authorities to approve new rules on crypto assets “as a matter of urgency”.

The rules, first published in September 2020, have not been yet agreed upon by the EU, and are not set for approval until 2024 at the earliest, the ECB said.

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