(Finance) – Although last year was rather turbulent for cryptocurrencies and DeFithe impact on the financial system has been limited, as the cryptocurrency market has “few interconnections with the financial sector traditional and the real economy”, and “none of these links are currently significant“. This was stated by the European Systemic Risk Board (ESRB) in a new report on the subject.
The EU agency, responsible for the macro-prudential supervision of the financial system, has estimated that the value of the cryptocurrency world represents only 0.8% of the size of the financial sector of European Union. Furthermore, there is only sporadic correlation between crypto-asset booms and busts and traditional finance, and including crypto-assets in a portfolio of stocks, bonds and gold “would not appear to lead to an improved risk-reward profile.” Finally, theEU banks’ commitment to crypto assets ‘is very limited’.
However, given their exponential growth and the high volatility of cryptocurrencies, according to the ESRB they must be carefully monitored as they may pose systemic risks. Such risks could materialize if, for example, the interconnection with the traditional financial system increases over time, if new connections are not identified in a timely manner or if similar innovations – such as distributed ledger technology – are also widely adopted in traditional finance.
ESRB also proposes a series of actions and recommendations to better address these risks. First, the EU capacity to monitor potential channels of contagion should be improved. This applies to both the channels between the cryptocurrency sector and traditional finance, as well as the channels within the cryptocurrency sector.
To this end, it is crucial to promote standardized reporting and disclosure requirements for: traditional financial sector institutions such as banks that are exposed to cryptocurrencies; investment funds with crypto exposures; entities such as stablecoin issuers or e-wallet service providers in the cryptocurrency industry.
Second, the report considers policy options to address the risks arising from cryptocurrency conglomerates, financial leverage based on cryptocurrencies, new operational challenges, DeFi and cryptocurrency lending.