As the crypto industry continues to develop reciprocal connections with traditional finance, the risks posed by a sudden crisis of the former to the global economy are rising. Such is the opinion of the European Systemic Risk Board (ESRB), which calls for tightening the scrutiny of the digital assets market. 

On May 25, the ESRB — an oversight body within the European Central Bank — published its report on crypto assets and decentralized finance (DeFi). The central thesis of the 77-page document is that the volatile crypto industry is growing, and its interconnectedness with the mainstream financial market is increasing. While the shocks of 2022 in crypto didn’t trigger the same amount of damage in TradFi, the current risk monitoring system is insufficient to track troubling tendencies in years to come.

The ESRB proposes improving the European Union’s capacity to monitor the crypto space, and the channels between it and the larger finance market. It recommends that the EU promote standardized disclosure reporting from banks and investment funds dealing with crypto.

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The report draws special attention to stablecoins. The first of the speculative, risky scenarios it names is a “run on a reserve-backed stablecoin.” This is understandable, given that stablecoin reserves may consist of sovereign and private bonds, shares, fiat currencies and other conventional assets. The ESRB mentions the lack of transparency regarding stablecoins, providing the example of Tether (USDT), with a market capitalization reaching $83 billion, despite few details about its reserves.

Also mentioned by the ESRB is the lack of measures in the upcoming Markets in Crypto-Assets legislation regarding so-called “crypto-asset conglomerates.” In the ESRB’s definition, conglomerates are those crypto companies that run several different types of operations, such as custody and trading, under one roof, like Binance. Combining activities bears risks, and the watchdog urges regulators to “study” crypto asset conglomerates. However, such recommendations are still milder than the appeals to prosecute combined activity in crypto, characteristic to United States regulators.

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