EU Regulatory Board Sounds Alarm on Potential Stablecoin-Triggered Bank Runs
ESRB claims that the potential for economic turbulence precipitated by an abrupt crypto crisis looms larger.
The European Systemic Risk Board (ESRB), an overarching body within the European Central Bank, unveiled its comprehensive report on crypto assets and decentralized finance (DeFi) on May 25th.
According to the report, the core proposition of this 77-page document underscores the growth and escalating interconnectedness of the volatile crypto industry with the mainstream financial market.
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On top of that, the European Systemic Risk Board claims that as the cryptocurrency realm deepens its roots in the traditional financial landscape, the potential for economic turbulence precipitated by an abrupt crypto crisis looms larger.
Even though the crypto shocks of 2022 didn’t lead to equivalent repercussions in the traditional finance sector, the ESRB suggests that the current risk monitoring system cannot trace worrisome trends in the future.
A key proposal from the ESRB is to bolster the European Union’s ability to supervise the crypto arena and the conduits that link it with the broader financial market. To accomplish this, the body recommends that the EU encourage banks and investment funds involved with crypto to uphold standardized disclosure reporting.
It is worth noting that the ESRB report largely focuses on stablecoins and their impact on the financial world. The watchdog claims the riskiest scenario in this sense is a “run on a reserve-backed stablecoin.”
This concern arises from the fact that stablecoin reserves can comprise sovereign and private bonds, shares, fiat currencies, and other traditional assets.
The ESRB expresses concern over the lack of transparency concerning these assets, citing Tether (USDT) — with a market capitalization of up to $83 billion — as an example of a stablecoin with limited disclosure about its reserves.
At the end of April, the European Parliament passed the groundbreaking crypto-focused Markets in Crypto-Assets Act (MiCA) regulation.
The ESRB’s call for increased scrutiny of the crypto industry, especially stablecoins, signals a growing concern over the potential risks of the burgeoning sector to the global economy. As the relationship between cryptocurrencies and traditional finance continues to intertwine, the necessity for robust monitoring systems and transparent practices becomes all the more pressing.