The European Securities and Markets Authority (ESMA) released a report last week on financial trends and risks, including cryptocurrencies and DLT technology.
The 110-page report looks at cryptocurrencies as a trending concept, which is on the rise for its innovative features, but is a threat to sustainable finance due to the environmental cost of crypto mining. The report also suggests that volatility in crypto assets, combined with the rise of decentralized finance (DeFi), central bank digital currencies (CBDC), and stablecoins, has contributed to increased risk across all asset classes. The report includes the following statements:
As is known, ESMA is an independent EU institution tasked with improving investor protection and promoting stable financial markets. This report from ESMA comes as EU regulators begin work on establishing anti-money laundering (AML) rules and tax reporting requirements for crypto-asset trading platforms and investors. However, as we have announced before, the European Central Bank will start working on the digital euro in October.
Additionally, the European Central Bank (ECB) will begin a two-year investigation for the digital euro in October.
Causes Increased Volatility
According to the published report, the increase in risk-taking behavior and market enthusiasm leads to increased volatility in the stock markets. To give an example, the increased risk appetite has caused volatility in the stock (such as the GameStop event) and crypto asset markets.
Earlier this year, as we shared with you, retail investors gathered behind Gamestop shares to rally and new traders suffered huge losses as the price dropped following the initial excitement of the move.
“Looking forward, we expect to continue to see a long period of risk for further—possibly significant—market corrections for institutional and retail investors, with very high risks across the entire ESMA mandate,” the report said.
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