In the midst of the current debate over the future of digital assets, particularly in the European Union, the European Central Bank has published an article on the subject. The article, titled ‘Decrypting Financial Stability Risks in Crypto Asset Markets,’ delves into current developments in the crypto industry, including the recent depegging of stablecoins such as UST and USDT.
Stablecoins like UST and USDT not as stable as their names imply.
According to the ECB, the risks to financial stability in the EU posed by crypto assets were previously limited. However, as evidenced by the recent TerraUSD crash and Tether de-peg, there is a need to discuss the risks and developments in stablecoins. These stablecoins ‘are not as stable as their name implies and cannot always guarantee their peg.’
Since 2020, the Crypto-Verse has expanded dramatically
Furthermore, according to the ECB article, the crypto-verse has grown dramatically in size and complexity since the end of 2020, expanding beyond Bitcoin.
The crypto market capitalization has increased roughly sevenfold since the beginning of 2020. According to the article, cryptocurrency trade volumes have occasionally exceeded those of traditional exchanges such as the NYSE. It reads:
Trading volumes for the most representative crypto-assets (including Bitcoin, Ether, and Tether) have occasionally been comparable to, if not exceeded, those of the New York Stock Exchange or eurozone sovereign bond quarterly trading volumes.
There are now over 16,000 crypto-assets in existence (ten new crypto-assets are launched on average every day), but only about 25 crypto-assets have a market capitalisation comparable to that of large-cap equity.
Crypto markets are rapidly evolving and may pose risks to financial stability.
The ECB team made the following observations about the crypto industry in the article’s conclusion.
The nature and scale of the crypto markets are rapidly changing. If current trends continue, cryptocurrencies may endanger financial stability.
Because of the interconnectedness of the traditional financial sector and the crypto markets, the use of leverage and lending activities will increase systemic risks.
The European Union should prioritize cryptocurrency regulation.