European watchdog warns of possible bank run on stablecoins

The European Systemic Risk Board (ESRB) emphasizes that the increasing integration of the crypto industry with traditional finance increases the risks of a possibly unexpected crisis that could affect the global economy. That is why the ESRB is calling for stricter regulation and supervision of the digital asset market.

Oversee crypto space

On May 25, the ESRB, a supervisory body of the European Central Bank, her report published on crypto assets and decentralized finance (DeFi). The 77-page document highlights that the volatile crypto industry is growing and becoming increasingly intertwined with the mainstream financial market. While the shocks of the past year in the crypto world have not caused the same damage as in the traditional financial sector (TradFi), the current risk monitoring system is inadequate to detect all the worrying trends in the coming years.

The ESRB advocates using the capacity of the European Union to oversee the crypto space and improve connections between this space and the wider financial market. To achieve this, it is proposed that the EU should promote standardized disclosure reporting from banks and investment funds involved in crypto.

Special emphasis on stablecoins

The report places a special emphasis on stablecoins. It is the first to cite a speculative and high-risk scenario called the “run on a reserve-backed stablecoin.” This is understandable, as stablecoin reserves can include government and private bonds, stocks, fiat currencies, and other conventional assets. Pointing to the lack of transparency regarding these assets, the ESRB gives the example of Tether, whose market cap has risen to $83 billion while few details are known about its reserves.

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The regulators also note that the upcoming pan-European legislation for markets in crypto-assets (MiCA) falls short of measures regarding so-called “crypto-asset conglomerates”. In the ESRB’s definition, conglomerates refer to crypto companies that conduct different types of activities (such as custody and trading) under one roof, such as Binance. Combining these activities carries risks, and the regulator is calling on regulators to investigate crypto asset conglomerates. It is worth noting that such recommendations are still much more moderate than calls from US regulators to address combined activities in the crypto sector.

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