EU warns crypto risks may disrupt financial stability

The European Securities and Markets Authority (ESMA) has raised concerns about the growing impact of cryptocurrencies on traditional financial systems as the industry expands and intertwines with established markets.

In a statement to the Economic and Monetary Affairs Committee on April 8, ESMA’s executive director Natasha Cazenave highlighted potential systemic risks posed by sharp price declines in crypto markets.

“We cannot rule out that future sharp drops in crypto prices could have knock-on effects on our financial system,” Cazenave stated. 

While crypto currently represents only 1% of global financial assets, its influence is increasing, particularly in the United States, where connections between crypto and traditional markets are deepening. 

Cazenave emphasised the need for close monitoring of these developments, noting that even disruptions in smaller markets could trigger broader stability issues. 

“Crypto-assets markets evolve quickly, in an often unpredictable manner, and we need to keep a close eye on these developments,” she added. 

The ESMA report also pointed to risks linked to stablecoins, hacks, scams, and scandals, referencing incidents such as the $1.4 billion Bybit exploit and the collapse of FTX (CRYPTO:FTT) in November 2022. 

Although the European Union has implemented the Markets in Crypto-Assets (MiCA) regulation to address these concerns, Cazenave warned that additional measures might be necessary as no crypto asset can be considered entirely safe.

She described MiCA as a “breakthrough” but stressed the importance of ongoing regulatory adjustments to mitigate emerging risks.

Retail participation in cryptocurrencies is rising across Europe, with an estimated 10% to 20% of investors holding crypto assets.

However, institutional involvement remains limited, as over 95% of European banks have yet to engage with crypto-related activities.

This contrasts with the United States, where adoption is more advanced, with up to 28% of individuals reportedly involved in crypto investments.