EU regulator sees crypto as sign of increased risk-taking in current climate

The European Securities and Markets Authority has published its report, “Trends, Risks and Vulnerabilities in the European Union Markets During the First Half of 2021” (1H21)

Its key takeaways were the argument that crypto markets’ extraordinary volatility, growth and regulatory requirements make it a compelling case to have a targeted regulatory system. This was outlined in the European Commission’s Markets in Crypto-Assets regulations.

A lot has depended on the recovery of the EU and global markets during 1H21, given the continuing impact of the COVID-19 Pandemic. The ESMA report states that the overall economic outlook is improving, with the European economy expected to reach its pre-pandemic output by 2022. This is earlier than was anticipated.

The relaxation of restrictions on public health, some reductions in uncertainty and the central banks’ support for monetary policies have fueled this recovery. ESMA considers the crypto markets to be a gauge of market sentiment and dynamics over the past six months, in terms of medium-term climate risks.

“Rising valuations across asset types, large price swings in cryptoassets, and event-driven risk observed in 1H21 amid high trading volumes raise questions about increased market risk-taking and possible market exuberance.”

The ESMA believes this exuberance can be seen in the GameStop saga, the wider rise of social media-fueled retail trade, and the massive price growth in crypto assets during the first quarter of 2018. The report highlights that much of the increase in trading activity occurred outside of the EU’s regulatory boundaries, which raises investor protection concerns.

The ESMA attributed the rise in consumer confidence over this period to a variety of factors including innovative business models and gamified mobile and online trading platforms. Parallel to the retail trading boom the ESMA is closely monitoring decentralized finance (DeFi). The 47 billion euros ($55.3 Billion) that was locked up in DeFi in September was lower than its peak in mid-May but up 1,200% since the end of July 2020.

The ESMA acknowledged DeFi’s advantages, including 24/7 availability, disintermediation and censorship resistance. However, the ESMA noted that the growing use of central bank digital currencies and stablecoins will likely make the distinction between traditional finance (and DeFi) more porous in the future. ESMA recognized that DeFi risks could spill over into the real world, mainly due to the proactivity of institutional investors.

Related: EU Securities regulator warns of risks from ‘nonregulated’ cryptocurrency

According to the report, institutional investors are beginning to look at Bitcoin’s (BTC), environmental impact as a part of their ESG targets. This is fueling Ether’s (ETH) growing interest. The ESMA credited ETH’s success, in addition to its environmental credentials, to its smart contract functionality, DeFi boom and its role in the nonfungible token eco-system.

Pantera Capital CEO Dan Morehead has echoed the regulator’s assessment. He argued this summer that Ether’s upgrade to the blockchain will likely allow it to surpass Bitcoin as the most valuable cryptocurrency.

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Eileen Wilson

Eileen Wilson –Technology and Energy My Name is Eileen Wilson with more than 5 years of experience in the Stock market industry, I am energetic about Technology news, started my career as an author then, later climbing my way up towards success into senior positions. I can consider myself as the backbone behind the success and growth of with a dream to expand the reach out of the industry on a global scale. I am also a contributor and an editor of the Technology and Energy category. I experienced a critical analysis of companies and extracted the most noteworthy information for our vibrant investor network.

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