Cryptos are going to pose financial stability risks as the industry continues on an upward trajectory and financial firms intensify involvement, according to the European Central Bank.
The crypto market has been on a downward trend, with May being the worst hit, following the crash of the terraUSD, commonly referred to as UST. The crash resulted in the amplified call from global leaders for prompt and comprehensive regulations of the sector.
Bitcoin Backtracks, Peals Off a Huge Value from the Crypto Market
The crypto niche, an area that has historically been favored by risk-hungry investors, exploded during the COVID-19 pandemic era in 2020. Institutional investors got interested because they considered Bitcoin to be a good hedge against inflation and, at the same time, offered more returns compared to other assets.
The crypto sector peaked in November 2021 when the total market cap hit USD 2.9 billion. However, the largest crypto, Bitcoin, has shed its value by more than 50% recently, pulling down the overall market cap by USD 1.2 trillion.
In its biannual financial stability review, the E.U Central Bank said that exposure to cryptocurrencies by banks on a larger scale is likely to put capital at greater risk and damage the confidence of investors. The lending and financial markets are also likely to be at threat. “Systemic risk increases in line with the level of interconnectedness between crypto-assets and the traditional financial sector,” indicated the report.
More Retail Investors Getting into Cryptos, ECB Calls for Prompt Regulation
Data shortcomings in the sector also stand on the path to a positive assessment of financial risks. The report warned that publications made by crypto exchanges should always be treated with a lot of caution.
ECB further noted that retail investors have also grown steadily. One in ten households in the eurozone has bought cryptos, reported the Consumer Expectation Survey that ran a poll on six countries.
Cryptos, according to the ECB, are not suitable for retail investors, and it called for the E.U. authorities to install new rules for cryptos as fast as possible.
The current rules, which were passed in September 2020 are yet to be agreed upon by the E.U. Parliament, and approval is likely to come no earlier than 2024.