EU's ESMA Raises Alarm Bells Over Growing Crypto Use as It Prepares for New Powers

Growing crypto take-up by investors means future crypto crashes could affect conventional financial markets, the European Securities and Markets Authority has warned in a paper published on Tuesday, noting the risk of consumer rip-offs and operational failures.

The document offers a first analysis of how officials at the agency see risks in the crypto market, as they prepare to take on new duties under the European Union’s Markets in Crypto Assets Regulation, MiCA.

“Due to their volatile growth cycles, and as long as relevant regulatory provisions do not apply, crypto-assets entail numerous risks which may in future become relevant for financial stability,” ESMA said.

“Multiple transmission channels between the crypto market and the traditional financial system exist,” the document said. “However, their scale remains limited at this time”

The document cites an April survey by regulators showing that, in April, just 90 European investment funds had direct exposure to crypto, with a further 20 exposed indirectly via derivatives – a drop in the ocean of the bloc’s 60,000 funds.

But officials warned that situation could change rapidly – citing auto maker Tesla, which last year said it would accept payments for its products in bitcoin before reconsidering, with both decisions affecting the price of the asset.

“Imagining a scenario in which a large retailer would enable crypto-assets as a payment option, or a leading tech company would introduce crypto-asset based peer-to-peer payments, consumer exposure could soar in a short period of time, strengthening the link” between the crypto and conventional financial realms, the document said.

ESMA officials are worried about repeating many of the risks which occur in traditional financial markets – such as price manipulation and mis-selling, citing exchanges such as Huobi and Bybit that allow risky bets via leverage of over 100 times.

But the study also looks at threats that are new to crypto – like manipulation of consensus mechanisms, large pseudonymous orders distorting prices, hacks and network congestion.

Under MiCA, expected to apply as of 2024, ESMA will be given new powers to decide exactly what needs to be in the white papers of newly issued assets, to heap extra regulation on those crypto assets deemed to resemble conventional financial instruments, and to monitor the largest service providers that have over 15 million customers.

Read more: Industry Offers Cautious Welcome to EU’s Landmark Crypto Law MiCA