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As the cryptocurrency sector witnesses significant turbulence, European Union authorities are advised to impose stricter regulations on leveraged bets on crypto assets. This advice comes from the European Systemic Risk Board (ESRB), an EU watchdog, which aims to avert shocks from the crypto sector that could jeopardize financial stability in broader markets.
The ESRB's suggestions encompass various strategies, from requiring regular reporting from all firms dealing with crypto assets to setting precise rules for the sector's largest players. This proposition comes on the heels of an intense period in the crypto industry, marked by considerable price volatility. For instance, the price of Bitcoin plummeted by up to 77%, and Luna, another cryptocurrency, saw a significant downfall. Exchange FTX, once a Super Bowl advertiser, succumbed to bankruptcy.
"Systemic risks could arise quickly and suddenly," warns the ESRB in a report, noting that the continued rapid growth trends in crypto assets could potentially endanger financial stability.
Among the ESRB's key recommendations is the introduction of leverage limits for investment funds exposed to crypto assets, which would mark a notable change from recent EU regulation. The watchdog further proposes limiting crypto firms' ability to lend tokens to their clients, a common method for placing leveraged bets. Moreover, the ESRB recommends setting higher collateral requirements for decentralized finance products and stablecoins.
While the ESRB's recommendations are not binding, they are likely to influence the EU's upcoming endeavors in refining its markets in cryptoassets regulation (MiCA).
The European regulators' move toward stricter crypto regulations hints at a concern that a potential recession in traditional economics might drive more investors toward the crypto market, hence necessitating a robust regulatory framework to protect financial stability. These proposed changes, aimed at maintaining market stability, signal a cautious and proactive approach from European regulators in managing a dynamic and volatile crypto market.