EU’s ESMA Gets Ready For New Powers as Crypto Use Increases

The European Securities and Markets Authority warned in a recently-published paper that the increasing adoption of cryptocurrencies by investors could result in future crypto crashes impacting traditional financial markets, citing the risk of consumer fraud and operational failures. Agency officials provide a preliminary analysis of the hazards they perceive in the cryptocurrency market in the paper as they are ready to take on new responsibilities under the Markets in Crypto Assets Regulation, or MiCA, of the European Union.

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

According to the study, just 90 European investment funds of the bloc’s 60,000 funds had direct exposure to cryptocurrencies in April. Another 20 funds were indirectly exposed through derivatives. However, authorities cautioned that the situation might quickly change. They cited the example of the automaker Tesla, which last year indicated it would accept bitcoin payments before changing its mind, with both moves impacting the asset’s price.

The study claimed that consumer awareness could quickly increase, reinforcing the connection between the crypto and traditional financial worlds, if a major shop enabled crypto assets as a payment option or a top tech business introduced peer-to-peer payments based on crypto assets. ESMA officials said that exchanges like Huobi and Bybit, which permit risky bets via leverage more than 100 times, many of the hazards that arise in traditional financial markets, such as price manipulation and mis-selling, might repeat themselves.

However, the research also considers other dangers to cryptocurrencies, such as network congestion, hacking, and the manipulation of consensus processes. According to MiCA, which is anticipated to take effect in 2024, ESMA will be given new authority to determine what information must be included in the white papers of newly issued assets, to impose additional regulation on crypto assets that are thought to resemble traditional financial instruments, and to keep an eye on the most prominent service providers with more than 15 million customers.

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