Amid a volatile period in the cryptocurrency sector, European Union authorities have received recommendations from the European Systemic Risk Board (ESRB), an EU watchdog, to implement stricter regulations on leveraged bets involving crypto assets. The objective is to prevent potential shocks from the crypto sector that could pose risks to the overall financial stability of broader markets.
The ESRB’s proposals encompass a range of strategies, including mandating regular reporting from all firms involved in crypto asset dealings and establishing specific rules for the largest players in the sector. This call for action comes as the crypto industry experiences significant price volatility, exemplified by Bitcoin’s staggering 77% drop and the notable decline of Luna, another cryptocurrency. The bankruptcy of FTX, previously known for its Super Bowl advertising, has further underscored the challenges faced by the industry.
“The emergence of systemic risks can occur rapidly and unexpectedly,” cautions the ESRB in a report, emphasizing that the ongoing rapid growth of crypto assets could potentially endanger financial stability. One of the ESRB’s key recommendations is the implementation of leverage limits for investment funds exposed to crypto assets, representing a notable departure from recent EU regulations.
In addition, the watchdog proposes restrictions on crypto firms’ ability to lend tokens to clients, a common practice for facilitating leveraged bets.
The ESRB also suggests imposing higher collateral requirements for decentralized finance products and stablecoins. Although the ESRB’s recommendations are not legally binding, they are expected to wield influence over the EU’s forthcoming efforts to refine its regulation of crypto assets under the Markets in Cryptoassets Regulation (MiCA).
The European regulators‘ push for stricter crypto regulations reflects concerns that a potential economic downturn in traditional markets may drive more investors toward the crypto market, necessitating a robust regulatory framework to safeguard financial stability. These proposed changes, aimed at preserving market stability, demonstrate a cautious and proactive approach from European regulators to managing the dynamic and volatile crypto market.
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