ESRB Report Outlines Policy Recommendations to Regulate and Mitigate Systemic Risk of Crypto Industry

The European Systemic Risk Board (ESRB) has published a report providing a succinct outline of the global digital asset industry while outlining policy recommendations to regulate crypto and decentralized finance (DeFi). Similar to other reports, the ESRB views crypto as not systemically risky while noting this could change as the sector grows and evolves.

Earlier this month, the European Union approved MiCA or Markets in Crypto-Assets regulation. The legislation aims to allow all EU member states to provide digital asset services in a harmonized environment. In light of this recent development, the ESRB recommends the following policy initiatives:

  • Improve the EU’s capacity to monitor potential contagion channels between the crypto-asset sector and the traditional financial sector, and within the crypto-asset sector.
  • Carry out assessments of risks posed by (a) crypto-conglomerates, taking account of market developments following the application of MiCA; and (b) leverage using crypto-assets, and identify potential additional actions to mitigate observed risks.
  • Promote EU-level knowledge exchange and monitoring of market developments, focusing on the following areas where risks may emerge, notably relating to (a) operational resilience, (b) DeFi, and (c) crypto-asset staking and lending.

The report posits the potential for systemic risk, including:

  •  (i) If their interconnectedness with the traditional financial system increases over time,
  • (ii) their connections to the traditional financial system are not identified before they cause problems, and
  • (iii) similar technologies are adopted in traditional finance.

Overall, the ESRB report is one of the best snapshots of the global crypto industry aggregating information from multiple sources and packaging it in an easily consumable document. The report was prepared by the ESRB Task Force on Crypto-Assets and Decentralised Finance (CATF) which was co-chaired by Steffen Kern (ESMA) and Richard Portes (London Business School) with input from many others.

You may view the report here.

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