After the crypto-crash, the ECB publishes a very critical note on the sector

In this note, the European Central Bank, which sees the sector gaining momentum, underlines the risks to financial stability.

After the words of Christine Lagarde, the boss of the European Central Bank (ECB) who believes that cryptocurrencies “are worth nothing”, the institute published a very critical note on the sector on Tuesday.

The note, titled “Deciphering Financial Stability Risks in Cryptocurrency Markets,” clearly sets the tone. Although the ECB has taken a critical view of the industry from the start, the recent storm in the cryptocurrency market has allowed it to assert its point of view.

“The risks that cryptocurrencies pose to the financial stability of the euro zone have been considered limited in the past,” the ECB believes. The latter compares in particular the cryptocurrency market, which weighs 1.263 billion dollars in capitalization – or only 1% of the traditional financial market – to that of the securitized (subprime) risk mortgages markets “that triggered the financial crisis. global of 2007. -2008 “.

“The nature and size of cryptocurrency markets are changing rapidly, and if current trends continue, cryptocurrencies will pose risks to financial stability. If the interconnectedness between unsecured cryptocurrencies and the traditional financial sector has developed considerably,” the interconnections and other channels of contagion have so far remained sufficiently weak ”, believes the ECB.

In support of his point of view, he specifically refers to the episode of the blockchain Terra, which saw its stablecoin terra usd (UST) collapse, disrupting the entire stablecoin market. For the ECB, it’s clear: Tether’s UST and USDT stablecoins have proven not to be “as stable as their name suggests”.

Two services targeted by the ECB

The institution is particularly critical of two areas: platforms that allow investors to achieve record leverage and those that offer loans in decentralized finance.

“Some cryptocurrency exchanges offer ways to increase exposure up to 125 times the initial investment. However, the total volumes of leveraged contracts in the cryptocurrency markets and the extent to which” leverage is actually used on these trading platforms. they are not generally reported. In addition, some investors use borrowed funds to buy their exposure (margin trading), thus increasing the risks to financial stability. “

In this regard, the institute mentions some players who offer this type of service, such as the giant Binance, Bibyt and even FTX.

Furthermore, the ECB refers to the world of decentralized finance (DeFi), which is seeing the emergence of many protocols that offer lending services to individuals and investors, such as the Anchor protocol of the Terra blockchain.

According to data from DeFi Llama, the total frozen value (TVL, i.e. funds frozen in various protocols in exchange for interest payments) on all DeFi protocols so far is $ 144 billion, up from $ 261 billion as of May 5. Despite this decline, the DeFi market remains booming if we look at it over a longer period. Thus, this aggregate TVL amount was only 1.14 billion on May 23, 2020.

“DeFi platforms that mimic traditional financial services would do well to ensure compliance with existing European financial regulations before offering their services to EU clients to avoid the risk of any court action,” the institution emphasizes.

The ECB refers in particular to a fine of 100 million imposed by the Securities and Exchange Commission (SEC), the American financial policeman, on the BlockFi platform which had not declared its loan service.

In this context, the ECB believes that European regulations, currently being negotiated in Brussels and which concern crypto players, must go faster. “The MiCA regulation (” Markets in Crypto-Assets “, ed.) Should be urgently approved by the co-legislators in order to ensure its application as soon as possible”.

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