On May 25, The European Systemic Risk Board (ESRB) has released a report looking at the systemic implications of crypto markets and proposes various policy options to address the risks associated with crypto assets and decentralized finance (DeFi).
The report notes that despite the past year being turbulent for cryptocurrencies and DeFi, their impact on the financial system has been limited. The cryptocurrency market has few interconnections with the traditional financial sector and the real economy, and none of these links is currently significant..
However, due to the exponential growth and high volatility of cryptocurrencies, they need to be closely monitored as they could pose systemic risksreview the report.
They believe these risks could materialize if, for example, interconnectedness with the traditional financial system increases over time and new connections are not quickly identified, or if similar innovations, such as distributed ledger technology, are widely adopted in traditional finance.
In order to better understand the evolution of crypto assets and their possible implications for financial stability, the report proposes a series of policy options.
Improve supervision and control of contagion channels
The report outlines that, first of all, it is necessary to strengthen the capacity of the European Union to monitor possible contagion channels. This applies both to interactions between the cryptocurrency sector and traditional finance, as well as interactions within the cryptocurrency sector itself.
Second, the report examines policy options to address the risks from cryptocurrency conglomerates, cryptocurrency-based leverage, novel operating challenges, DeFi, and cryptocurrency gambling and lending.
All of these policy options could serve as the foundation for future regulatory initiatives, providing a robust framework to address the risks inherent in cryptocurrencies and decentralized finance.
The report acknowledges that:In general, the accounting of crypto assets is a complex issue, still subject to substantial uncertainty and allowing substantial room for maneuver for holders to define applicable accounting policies. This uncertainty is not caused by the accounting standards themselves, but is directly related to the definition of crypto assets, which encompasses a wide range of assets with different characteristics. In general, the holder of crypto assets may need to analyze the most appropriate accounting treatment on a case-by-case basis.”.
Contradictoryly, the ESRB report highlights the importance of closely monitoring crypto assets due to their growth and volatility, despite maintaining that the connection to traditional finance is not significant.
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