May 2022 saw the publication of the Financial Stability Review (FSR) prepared by the European Central Bank. This material has been developed with the participation of the Financial Stability Committee of the ESCB. FSR has been prepared in order to promote the idea of financial stability and the awareness of systemic risk with regard to crypto-assets.

The report indicates that while interconnectedness between unbacked crypto-assets and the traditional financial sector has grown considerably in the recent years, interconnections and other contagion channels have so far remained sufficiently small. Investors have been able to handle the EUR 1.3 trillion fall in the market capitalisation of unbacked crypto-assets since November 2021 without any financial stability risks being incurred.

However, the European Central Bank warns that a point may soon be reached where unbacked crypto-assets might represent a risk to financial stability. ‘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,’ notes the report. ‘Based on the developments observed to date, crypto-asset markets currently show all the signs of an emerging financial stability risk.’

According to the ECB, it is key for regulators and supervisors to monitor developments attentively and close regulatory gaps or arbitrage possibilities. As this is a global market, global coordination of regulatory measures is necessary.

Source:

https://www.ecb.europa.eu/pub/financial-stability/fsr/html/ecb.fsr202205~f207f46ea0.en.html