Cryptos, a threat to European financial stability, really?

Cryptos and blockchain are presented as a major technological evolution. Some believe that they have the potential to be profoundly altered in all economic sectors of modern society, including finance. But they also present many risks, which are less often not mentioned.

Cryptos: Unwavering enthusiasm despite latent risks

The enthusiasm of users for cryptos does not weaken. There is indeed a certain appetite for this market which, despite its generally downward trends, remains particularly dynamic.

However, these positive signs do not conceal the fact thatthey also remain essentially risky. This is what the European Systemic Risk Board (ESRB) recalled on Thursday, May 25.

The body called on authorities in the European Union to take action to limit the threats posed by cryptos. In particular those implementing leveraged bets.

The ESRB sounds the Alarm against Financial Risks

For investors, these consist, concretely, in massively investing funds, often borrowed, with the aim of making a profit. Except that the risk being inversely proportional to the return, they can make profit as well as lose their funds. This, with a direct consequence for the stability of the financial markets.

Given the extreme volatility in the crypto market, the ESRB fears financial disruption from leveraged betting. These could compound the impact and duration of crypto market fluctuations. If nothing is done, the organization points out, the financial consequences could be dramatic.

“Systemic risks could arise quickly and suddenly. If the rapid growth trends seen in recent years were to continue, cryptos could pose risks to financial stability”alerts the ESRB in a report that deals with the issue.

According to the document, preventing these risks already means introducing “leverage limits for investment funds exposed to crypto”. It also means raising the ceiling of guarantees required of crypto firms for distributed financial products and stablecoins.

But the most effective measure would be to restrict the possibilities for crypto companies to lend tokens to their users. It remains to be seen whether these recommendations, which are not legally binding, would be implemented.