ESRB Releases Report on Cryptos and Decentralized Finance

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PRESS RELEASE

May 25, 2023

The European Systemic Risk Board (ESRB) today released a report outlining the systemic implications of crypto markets and offering policy options to address the risks arising from crypto-assets and decentralized finance (DeFi).

The report finds that while the past year has been turbulent for cryptos and DeFi, the impact on the financial system has been limited. The crypto market has few ties to the traditional financial sector and the real economy, and none of those ties are currently significant.

However, given the exponential growth and high volatility of cryptos, they need to be watched closely as they can pose systemic risks. These risks could materialize if, for example, interconnection with the traditional financial system increases over time, if new connections are not quickly identified, or if similar innovations such as distributed ledger technology are also widely adopted in traditional finance.

To better understand the evolution of crypto-assets and their potential implications for financial stability, the report offers a number of policy options.

First, the EU’s ability to monitor potential contagion channels should be improved. This applies both to channels between the crypto industry and traditional finance, and to channels within the crypto industry. To this end, it is essential to promote standardized reporting and disclosure requirements for: (i) institutions in the traditional financial sector such as banks that are exposed to crypto; (ii) investment funds with crypto exposures; and (iii) entities such as stablecoin issuers or e-wallet service providers in the crypto industry. Second, the report examines policy options to address risks arising from crypto conglomerates, crypto-based leverage, new operational challenges, DeFi, and crypto staking and lending. .

These policy options could also inform any future regulatory initiative.

For media inquiries, please contact Daniel Weber, tel. : +49 69 172 8344 539.

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