Investors’ growing adoption of crypto means future crashes of the digital assets could affect traditional financial markets, the European Securities and Markets Authority (ESMA) warned in a paper published today, pointing out the growing risk of operational failure and consumer rip-offs, CoinDesk reported.
The paper presents an analysis of how agency officials see crypto market risk as they prepare for their new responsibilities under the upcoming framework EU Regulation on Crypto Asset Markets.
Direct crypto exposure is still limited
The paper cites the results of a regulatory survey in April, which show only 90 European investment funds had direct crypto exposure. Around two dozen more had indirect exposure via derivatives. To compare, the EU has 60,000 funds in total.
The ESMA wrote in the document, “Due to their volatile growth cycles, and as long as relevant regulatory provisions do not apply, crypto-assets entail numerous risks which may in future become relevant for financial stability.
“Multiple transmission channels between the crypto market and the traditional financial system exist, but their scale remains limited at this time.”
Rapid change is possible
According to officials, this situation could change in the blink of an eye. They gave carmaker Tesla as an example. The company announced it would accept payments for its products in bitcoin last year, then changed its mind, but both decisions had a profound impact on bitcoin’s price.
Officials state the connection between crypto and traditional financial markets would become stronger if a major tech firm introduced crypto-based peer-to-peer payments or a leading retailer started to accept crypto as payment. In this scenario, consumer exposure could soar in a very brief period of time.
The risk of history repeating itself
ESMA officials are concerned about history repeating itself. More specifically, risks like mis-selling and price manipulation occur in conventional financial markets. For example, exchanges like Bybit and Huobi let users make bets with as much as 100x leverage.
New and unique threats
The study also looked at previously nonexistent threats like large pseudonymous orders skewing prices, manipulation of consensus mechanisms, network congestion, and others unique to crypto.
Under the EU Regulation on Crypto Asset Markets, which is expected to take effect in 2024, ESMA will have new privileges and powers to introduce additional regulations on crypto assets, considered similar to conventional assets.
The authority will also be able to guide the content of new assets’ white papers and monitor major service providers, who have 15 million or more customers.