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ECB calls for action on contagion risk of crypto assets

Cryptocurrencies1The crypto assets market will pose a threat to financial stability if it continues to grow at the current rapid rate, according to the European Central Bank (ECB).

The central bank has called crypto assets an “emerging financial stability risk” and has called for a coordinated response from global supervisors and monetary policy makers.

The call comes after a period of massive volatility in the sector which has seen a €1.3 trillion fall in the market capitalisation of unbacked crypto since November 2021.

Of particular concern to the ECB is the interconnectedness between the traditional financial sector and the less regulated world of unbacked crypto.

"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," states the ECB in its report. 

"Based on the developments observed to date, crypto-asset markets currently show all the signs of an emerging financial stability risk."

The ECB stressed the need for supervisors to monitor developments and ensure a globally coordinated response to avoid regulatory gaps and arbitrage opportunities.

“Data gaps should be closed,” it states. “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 ECB’s president Christine Lagarde, a noted crypto-sceptic, recently commented on the merit of cryptocurrencies, telling Dutch TV: “My very humble assessment is that it is worth nothing. There is no underlying asset to act as an anchor of safety.”

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