Recently, the European Systemic Risk Board (ESRB) unveiled a statement in its latest report related to the “systemic implications” of crypto and policy formulation. According to the ESRB report, the cryptocurrency market capitalization is very small compared to traditional finance. Any shocks, or failure of guidelines are not susceptible to any contagion effects outside the crypto industry.
The report started by informing about the situation of crypto last year and its volatile behavior. In 2022, the prices of cryptocurrencies fell to 75% as compared to their peak price in 2021. Additionally, it mentioned that the major failures happened in recent months like the collapse of the Silicon Valley Bank (SVB) in March 2023. According to reports, due to pressure, the stablecoin USD Coin (USDC) temporarily broke its peg to the US dollar after it was revealed that SVB had USD 3.3 billion in USDC reserves held by managing business Circle.
The ESRB also clarified that the crypto sector becomes more closely associated with the traditional finance system and will pose a significant threat to the real economy. To date, the crypto-asset world has had few links with and provided few services to the real economy, none of them vital. Also, algorithmic stablecoins have shown a relatively smooth decline in market capitalization, with one clear exception to date.
The report on crypto and decentralized finances (DeFi) also sheds light on current market conclusions related to its market trends. The market capitalization of crypto assets still seems to be quite small. Additionally, the total value of all crypto-assets, including reserve-backed stablecoins and Bitcoins that are allegedly missing, is still only 0.8% of the size of the European Union financial sector.
To tackle the uncertainties associated with digital asset business, it is necessary to bring standardized reporting and disclosure requirements for financial institutions. Institutions such as banks, investment funds, and platforms that are linked with crypto and stablecoins need to be very proactive to minimize the risks. Additionally, those activities related to crypto are not covered by MiCA regulation and need a new comprehensive regulatory framework to supervise them. It will be interesting to see how impactful the ESRB report will be in guiding the crypto industry.