The European Union is hard at work with new rules for the crypto industry. The new MiCA legislation should ensure much more constructive policy than that of the American policymakers, but the EU is strict. If it is up to a major EU financial watchdog, there will soon be limits on leverage in the crypto industry.
EU keep an eye on crypto
In a research report the European Systemic Risk Board (ESRB) describes in detail how the crypto industry works and what the state of affairs is in the market. Like this writes It about how the prices of different cryptocurrencies have developed in recent years, including how the market is after the 2022 bear market.
Stablecoins in particular are an important topic for the ESRB. Stablecoins that lose their link with what they have to copy the value of are, according to the policymaker, a major risk to the financial stability of the EU. This ‘de-pegs‘ can drag the rest of the market along with it. The rest of the economy could suffer as well.
The report highlights that the crypto industry has few links to the “real economy,” but that could change in the future if adoption continues to grow. The ESRB does not have the jurisdiction to enact its worldview as official policy, but it could influence Markets in Crypto-Assets (MiCA) legislation.
Regulation against crypto levers
Perhaps more importantly, the ESRB wants a cap on how much debt investment funds can take on if they have exposure to crypto. This topic is so important to the institute that it used the word “leverage” 71 times in its 77-page report.
It distinguishes between three types of debt or leverage. First of all, there are ‘regular’ levers in crypto that you can use, for example, via exchanges to invest extra in coins. In addition, you can indirectly incur debt from traditional financial institutions by borrowing fiat currency.
Finally, you can go through Decentralized Finance (DeFi) Borrow. This is also an important topic for the institute, because the protocols often use volatile tokens to keep the network secure, for example. The policymaker emphasizes that this automatically brings more leverage to the market.