LONDON (Bloomberg) - The crypto industry’s deepening ties to banks and asset managers will pose a risk to financial stability, the European Central Bank has warned, in the latest sign of how central banks and governments are stepping up their scrutiny of the market.
The ECB said on Tuesday it had undertaken “a deep dive into cryptoasset leverage and crypto lending” and found evidence that these activities were becoming more risky, complex and interconnected with traditional institutions.
“Investors have been able to handle the €1.3tn fall in the market capitalization of unbacked cryptoassets since November 2021 without any financial stability risks being incurred,” the ECB said.
“However, at this rate, a point will be reached where unbacked cryptoassets represent a risk to financial stability.” The first such warning from the ECB, published as part of its twice-yearly financial stability review, followed similar messages from U.S. and UK authorities, which have been unnerved by a series of recent failures in the crypto market. Bitcoin, the world’s flagship cryptocurrency, has halved in value since November and recently fell below $30,000 for the first time since last summer.
The market’s most important stablecoin, tether, momentarily lost its peg to the U.S. dollar, while its rival terraUSD all but collapsed. The crypto market itself has boomed in size in recent years, with major platforms like Binance and FTX offering a wide array of complex financial products. The world’s biggest crypto exchanges processed almost $700bn in spot trading last month and $1.1tn in Bitcoin futures, according to data collated by The Block Crypto.
The ECB said trading volumes for cryptoassets “have at times been comparable with or even surpassed those of the New York Stock Exchange or euro area sovereign bond quarterly trading volumes”. At the same time, some crypto exchanges are offering loans to customers to allow them to increase their exposures by as much as 125 times their initial investment, it said. But “significant informational and data shortcomings persist”, which meant “the full extent of possible contagion channels with the traditional financial system cannot be fully ascertained”.