The crypto-asset ecosystem is undergoing rapid changes and innovations that pose new challenges and risks for regulators and financial stability authorities.
Crypto Conglomerates On the Eye of the ESRB
Crypto conglomerates have become large and complex entities over recent years. Some of these conglomerates have grown to a size and scale that could pose systemic risks if they fail or malfunction. One of the best things to come out of the crypto industry is DeFi, which uses smart contracts to facilitate transactions and agreements among users.
With the ever-evolving world of crypto and its many benefits for individual financial freedom, there has been an increasing need from governments all around to demand regulations and scrutiny for these conglomerates. The European Systemic Risk Board (ESRB), led by Christine Lagarde, the president of the European Central Bank, issued a report on Thursday that highlighted the potential dangers of crypto lending and staking, as well as the high leverage in digital asset markets, in light of the upcoming Markets in Crypto Assets regulation (MiCA) that will come into force in the EU in 2024.
The report recommends that authorities should monitor the activities and interlinkages of crypto conglomerates, assess their systemic importance and resilience, and ensure that they comply with existing rules on anti-money laundering, consumer protection, market integrity, and prudential requirements.
The EU Believes in Tightening Regulations
The report also suggests that authorities should develop a comprehensive framework for DeFi that covers the legal status and enforceability of smart contracts, the identification and accountability of service providers and users, the supervision and oversight of DeFi platforms and protocols, and the coordination and cooperation among national and international authorities.
According to MiCA, companies that provide different types of services, such as trading and custody, have to deal with possible conflicts of interest between their business lines. However, the ESRB pointed out that there is no general obligation to identify and manage the operational or reputational risks that could accumulate from offering such services.
The ESRB report is just another attempt by traditional institutions to regulate the entirety of the crypto ecosystem and the many financial liberties it has to offer. As the crypto-asset ecosystem continues to evolve and innovate, regulators and supervisors will continue their attempts to impose unnecessary regulations and scrutiny.