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Crypto is Volatile but Innovative says European Finance Authorities

Crypto is Volatile but Innovative says European Finance Authorities
  • ESMA says crypto is volatile but innovative.
  • The framework calls for more transparency and legal certainty.

The European Securities and Markets Authority (ESMA) notes in its report that crypto is volatile yet innovative. Meanwhile, Crypto assets and distributed ledger technology (DLT) topped the ESMA 2021 financial innovation scoreboard. In detail, ESMA is an independent European Union (EU).

Specifically, it aims to improve investor protection and promoting stable and orderly financial markets. Thus ESMA says crypto asset volatility, along with the rise of decentralized finance (DeFi), central bank digital currencies (CBDC), and stablecoins, are contributing to increased risks across all asset classes.

Also, a rise in risk-taking behavior and market exuberance is to blame for increased volatility in equity markets. Additionally, increased [risk-taking] behavior has led to volatility in equity (e.g., GameStop-related market movements) and crypto-asset markets. Likewise, crypto market capitalization fell by almost 40% in May, highlighting their high price volatility.

The ESMA report “Trends, Risks, and Vulnerabilities,” says

“Most crypto assets (CAs) are highly volatile in price and operate outside of the existing EU regulatory framework, which raises investor protection issues,”

Therefore ESMA is set to address the issue while finding solutions to curb such issues. To begin with, the EU’s upcoming Markets in Crypto Assets (MiCA) regulatory framework is designed to address these risks. The framework calls for more transparency and legal certainty on stable coins.

Also, estimates vary but they agree that the carbon footprint of cryptocurrencies is far from negligible, the report said. These developments trigger discussions about possible regulatory responses to the unintended consequences of innovation, and in particular of crypto mining. Lastly,  the report emphasized the proliferation of distributed ledger technology (DLT), DeFi, and CBDCs.

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