Cryptocurrencies will constitute a severe risk to the well-established financial regimens of the world, according to the European Central Bank (ECB). In a statement on Tuesday qouted by Reuters, ECB said that the rapid surge in the cryptocurrency sector and the involvement of financial firms had aggravated the risks.
The Crypto market has tanked sharply this month, including the downfall of the major stablecoin TERRA USD. The crash has once again highlighted the highly volatile nature of Crypto assets and the demand by the financial regulators for swift and comprehensive regulation of the sector.
Cryptocurrencies-Preferred By Profit Hungry Investors
Cryptocurrencies have been preferred by a segment of investors who are ready to take huge risks for unbelievable profits. One of the USP of cryptocurrencies like Bitcoin (BTC) is that it acts as a hedge against inflation, and this factor has attracted financial institutions.
The crypto sector swelled to $2.9 trillion in November 2021 from $300 billion at the start of 2020. However, since November, the value of the biggest cryptocurrency, Bitcoin, tanked by over half its value. It also dragged the value of the overall crypto market down to around $1.2 trillion.
The ECB was deliberating about financial stability in its biannual review and said that the exposure of banks and financial institutions to crypto would seriously put at-risk capital and, at the same time, erode consumer confidence as well as lending and financial markets. ECB also highlighted the interconnectedness risks between crypto-assets and the traditional financial sector.
Cryptocurrencies Data Highly Suspect
The crypto exchanges are also offering high leverage trading, which provokes investors to borrow funds for more significant investments n crypto sectors, thus significantly increasing the risks of financial instability.
Similarly, the lack of data has also made the publications by crypto exchanges and data aggregators suspect, and ECB has warned that they must be treated with caution. However, despite all the shortcomings Consumer Expectation Survey, which ran the poll in six countries, revealed that One in ten eurozone households have bought crypto such as bitcoin.
The ECB has also asked EU authorities to Fastrack new rules on the cryptocurrency sector and added that crypto was incompatible for most retail investors.