EU regulator sees crypto as sign of increased risk-taking in current climate

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The European Securities and Markets Authority (ESMA) has published its report on trends, risks and vulnerabilities in EU markets in the first half of 2021 (1H21).

His takeaways included the argument that the extraordinary volatility and growth of the crypto markets makes a compelling case for a targeted regulatory regime, as set out in the regulations proposed by the European Commission in the crypto markets. active.

The recovery of the EU and global markets during 1H21 was largely dependent on the continued impact of the COVID-19 pandemic. The ESMA report notes that the economic outlook has continued to improve overall, with the European economy now expected to reach pre-pandemic production by the end of 2022, earlier than expected.

This recovery has been fueled by the easing of public health restrictions, some reduction in uncertainty and the activism of central banks to provide supportive monetary policies. Regarding the medium-term risks of the current climate, ESMA has viewed the crypto markets as an indicator of sentiment and market dynamics over the past six months:

“Rising valuations across all asset classes, massive fluctuations in crypto-asset prices, and risks associated with 1H21 events against a backdrop of high trading volumes raise questions about increased risk-taking behavior. and possible market exuberance. “

This exuberance, from ESMA’s perspective, has been visible in the GameStop saga and the wider rise in social media-fueled retail, coupled with the huge growth in crypto asset prices in the first quarter of This year. Much of this increase in business activity has taken place outside the EU’s regulatory perimeter, the report points out, raising concerns about investor protection.

ESMA attributed the growing consumer confidence during this period to a range of factors, including innovative new business models and fun features in online and mobile trading platforms. Along with the retail boom, ESMA is keeping a close eye on decentralized finance (DeFi), noting that the € 47 billion ($ 55.3 billion) stuck in DeFi in early September was down from its highs mid-May, but up 1,200% from the end of July 2020.

ESMA recognized the benefits of DeFis, including disintermediation, 24/7 availability and censorship resistance, and noted that the increasing use of central bank stablecoins and digital currencies is likely to make the boundaries between traditional finance and DeFi more porous over time. However, not least because of the proactivity of institutional investors, ESMA found that there is a growing possibility that DeFi risks spill over into the real economy, even if the market remains small for the time being.

Related: EU Securities Regulator Warns Of Risks From Unregulated Cryptocurrencies

The report also notes that institutional investors are starting to consider the environmental impact of Bitcoin (BTC) in terms of ESG objectives, which is fueling growing interest in Ether (ETH). Along with its environmental credentials, ESMA attributed ETH’s success to its smart contract functionality, the DeFi boom, and the role of blockchain in the non-fungible token ecosystem.

The regulator’s assessment was echoed by Pantera Capital CEO Dan Morehead, who argued this summer that the blockchain upgrade would likely help Ether outflank Bitcoin as the largest cryptocurrency.

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