The European Central Bank says crypto-asset markets show all signs of an emerging financial stability risk as traditional financial institutions pile into the space
While interconnectedness between unbacked crypto-assets and the traditional financial sector has grown considerably, interconnections and other contagion channels have so far remained sufficiently small. Investors have been able to handle the €1.3 trillion fall in the market capitalisation of unbacked crypto-assets since November 2021 without any financial stability risks being incurred.
However, the central bank cautions that a point will be reached where unbacked crypto-assets represent a risk to financial stability.
"Systemic risk increases in line with the level of interconnectedness between the financial sector and the crypto-asset market, the use of leverage and lending activity," it writes in a report. "Based on the developments observed to date, crypto-asset markets currently show all the signs of an emerging financial stability risk."
The ECB says it is key for regulators and supervisors to monitor developments attentively and close regulatory gaps or arbitrage possibilities. As this is a global market and therefore a global issue, global coordination of regulatory measures is necessary.
"Any further steps that allow the traditional financial sector to increase its interconnectedness with the crypto-asset market space should be carefully weighed up, and priority should be given to avoiding financial stability risks," the report states. "This holds in particular when considering interconnections with parts of the financial system that are strictly regulated and benefit from a public safety net. Data gaps should be closed. The challenges faced in monitoring financial stability risks from crypto-assets developments and interconnectedness with the traditional financial sector will persist as long as there are no standardised reporting or disclosure requirements."
The publication of the report comes just days after crypto-sceptic and ECB president Christian Lagarde appeared on Dutch television, stating: "I have said all along the crypto assets are highly speculative, very risky assets. My very humble assessment is that it is worth nothing, it is based on nothing, there is no underlying asset to act as an anchor of safety.”