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Crypto links with banks pose threat to financial stability, says ECB

Deepening the crypto industry’s ties with banks and asset managers will pose a risk to financial stability, the European Central Bank warned, at the last sign of how central banks and governments are stepping up their market scrutiny.

The ECB said on Tuesday it had made a “deep dive into leveraging crypto assets and crypto loans” and found evidence that these activities are becoming more risky, more complex and linked to traditional institutions.

“Investors have been able to cope with the 1.3 billion euro decline in the market value of unsecured crypto assets since November 2021 without incurring risks of financial stability,” the ECB said. “However, at this rate, you will reach a point where unsecured crypto assets pose a risk to financial stability.”

The ECB’s first such warning, released as part of its biennial financial stability review, follows similar messages from US and UK authorities, which have been deterred by a string of recent failures in the crypto market.

Bitcoin, the world’s cryptocurrency flagship, has fallen half its value since November and recently dropped below $ 30,000 for the first time since last summer. The most important Stablecoin on the market, Tether, momentarily lost its linkage to the US dollar, while its competitor terraUSD almost Shrink view.

U.S. Treasury Secretary Janet Yellen recently warned that stable currencies present the same kind of risks associated with running banks, which resonates similarly Comparison By the Federal Reserve.

ECB President Christine Lagarde said over the weekend on Dutch television that a crypto token “is worth nothing, it is not based on anything, there is no underlying asset that will serve as an anchor of safety”. Fabio Panta, a senior ECB official, recently Comparator The sector to a “Ponzi scheme” and called for a regulatory attack to prevent “lawless madness of risk-taking”.

The central bank is working on a Digital Euro And aims to build a prototype for testing by next year before deciding whether to launch it three years later. Legard said the backed up digital currency at its central bank would be “completely different from many of these things.”

Relations between eurozone banks and cryptocurrencies have been “limited so far,” the ECB said in its report on Tuesday, adding: “Market contacts point to growing interest in 2021, mainly through expanded portfolios or related services related to digital assets (including Custody and Commercial Services).

He said large payment networks “have increased their support for crypto-asset services” and institutional investors “are now investing in bitcoin and crypto-assets more generally as well.”

Noting that German institutional investment funds have been allowed to put up to one-fifth of their holdings in crypto assets since last year, she said such investments were aided by the availability of crypto-based derivatives and listed securities.

The ECB also noted risks from decentralized finance, or DeFiWhere cryptocurrencies-based software offers financial services without the use of intermediaries such as banks.

“Crypto credit on DeFi platforms has grown by a factor of 14 in 2021, while the total lock-in value hovered around 70 billion euros until recently, at a similar value to small local banks in Europe on the periphery,” it read. Re-mortgaging, in which collateral can be pledged against another loan, has increased the likelihood of breach of leverage limits.

Some crypto exchanges offer loans to clients to allow them to increase their exposures up to 125 times their initial investment, the ECB said. But “significant lack of information and data persists,” which means that “the full extent of the possible channels of infection in the traditional financial system cannot be fully determined.”

Up to one in 10 households in the EU “may own crypto assets”, although most of them have invested less than € 5,000 in the sector, according to a recent ECB survey. Similarly, a Fed survey released Monday found that 12 percent of U.S. adults owned or used cryptocurrencies in 2021.

EU finishes legislation, Called crypto asset markets, but the ECB said it would not take effect until 2024 at the earliest. “Given the speed of crypto developments and the growing risks, it is important to bring crypto assets into the regulatory realm and under urgent supervision,” it read.

Another report by Scott Chipolina in London

Crypto links with banks pose threat to financial stability, says ECB Source link Crypto links with banks pose threat to financial stability, says ECB

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