ESMA Sounds Alarm on Crypto Contagion Risks in European Markets
The European Securities and Markets Authority (ESMA) has issued a warning about the potential risks of cryptocurrency contagion in Europe's financial markets. According to ESMA, nearly €2 trillion of market value has been stripped from crypto losses since their October highs.
The regulator points out that the convergence of crypto and traditional finance could lead to more market contagion, as evidenced by the decline in the value of cryptocurrencies such as Bitcoin. The ESMA report notes that tokenization and DeFi are growing, which may increase on-chain risks and deepen connections between the crypto and traditional financial systems.
The regulator also references decentralized finance (DeFi) hacks, which can cause losses or failure in other portions of the network. ESMA's analysis indicates that the organization of the industry is starting to matter more for the financial stability of the system as more capital flows into and out of the crypto and traditional markets.
The report arrives while the EU is developing a regulation for digital assets, with ESMA assessing that risks from cryptocurrencies continue to grow rapidly despite increased scrutiny.