The major topic of the 110-page report from the European Securities and Markets Authority (ESMA) was cryptocurrencies and distributed ledger technology.
Headings “Trends, Risks and Vulnerabilities” in the report, it was stated that cryptocurrencies are in a trend in financial innovations, but this sector is a threat in terms of sustainable finance due to rising mining costs and environmental impacts.
“They are out of EU regulations”
The report also noted that volatility in cryptocurrencies poses an increased risk to all asset classes of decentralized financial products, central bank digital currencies and stablecoins, emphasizing investor safety:
“Crypto-assets are extremely volatile. They also fall outside the EU regulatory framework. This raises investor protection issues.”
The report that came after the EU took action on crypto sanctions…
As an independent European Union institution, the task of ESMA is shown as stabilizing and ordering the markets. It is worth noting that the ESMA report comes at a time when EU regulators are starting to prepare for sweeping cryptocurrency regulations, new money laundering (AML) rules, and tax reporting requirements for virtual asset service providers and investors.
“There is risk for institutional and retail investors”
In the report, GameStop events at the beginning of the year were also reminded and it was stated that the risk appetite in the market was very high:
“We expect an extended risk period for institutional and retail investors in the regions within the ESMA remit in the coming period. We think this risk hazard is significant, given that the cryptocurrency market experienced a 40% drop in May.”
Hard restrictions are coming for stablecoins
In the report, it was stated that the “Crypto Asset Markets (MiCA)” regulation work, which the EU will prepare shortly, is designed to address these risks and that the rules to be applied in 27 states impose strict restrictions, especially for stablecoins. According to the information given, the restrictions include that the issuer of the stablecoin must hold at least 3% of the reserves of that coin:
“The potential impact of mass stablecoin adoption on financial systems continues to be scrutinized by global regulators. For greater transparency, Tether, the largest stablecoin issuer, has a more positive outlook as it offers a breakdown of its reserves in 2021.”
Environmental protection, the most discussed topic of the last period, was also mentioned in the report. While it was stated that the energy consumption of certain DLT protocols had a negative impact on the environment, the following statements were used:
“Through innovation, knowledge and practice gaps in ESG (Environmental, Social and Management) can be filled. This must be accomplished with Green Financial Technology solutions. However, the environmental costs and effects of cryptocurrencies in this sense are increasing.
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