ESRB Calls for Increased Scrutiny of Crypto Market

As the crypto industry continues to develop reciprocal connections with traditional finance, the risks posed to the global economy by a crisis in the former are growing.

According to the European Systemic Risk Board (ESRB), the market for digital assets should be subjected to greater scrutiny.

The European Central Bank’s (ECB) oversight body, the ESRB, published its report on crypto assets and decentralized finance (DeFi) on May 25.

The central argument of the 77-page report is that the volatile cryptocurrency industry is expanding and its interdependence with the mainstream financial market is growing.

While the crypto shocks of 2022 did not cause the same amount of damage in TradFi, the current risk monitoring system is insufficient to identify concerning trends in the years ahead.

The ESRB proposes enhancing the European Union’s ability to monitor the crypto space and its connections to the broader financial market.

It is suggested that the EU promote standardized disclosure reporting from banks and investment funds that deal with cryptocurrencies.

The report focuses specifically on stablecoins. First on the list of speculative and risky scenarios is a “run on a reserve-backed stablecoin.”

This makes sense, given that stablecoin reserves can consist of sovereign and private bonds, shares, fiat currencies, and other conventional assets.

The ESRB mentions the lack of transparency regarding stablecoins, citing Tether as an example, whose market capitalization has reached $83 billion despite the lack of information regarding its reserves.

The ESRB also mentions the lack of measures in the forthcoming Markets in Crypto-Assets legislation about so-called “crypto-asset conglomerates.”

According to the ESRB’s definition, conglomerates are crypto companies, such as Binance, that conduct multiple types of operations, such as custody and trading, under one roof.

The watchdog urges regulators to “study” crypto asset conglomerates due to the dangers associated with combining activities.

However, these recommendations are still more moderate than the calls to prosecute combined crypto activity typical of United States regulators.