ESRB Finds Crypto Doesn’t Pose Economic Risk, Experts Concur

While the past year has been rocky for decentralized finance (DeFi) and crypto, there was only limited impact on the financial system. The crypto market has few connections with the real economy and traditional finance (TradFi), and none of those connections are significant at this time according to a report published by the European Systemic Risk Board (ESRB) on May 25.

Risks can only increase if crypto and TradFi intertwine

The ESRB finds that risks could materialize if crypto becomes more interconnected with the traditional financial system, distributed ledger technology is adopted in TradFi, or new connections are not identified in a timely manner.

Bankless Times talked to Nikolay Denisenko, co-founder and CTO of Brighty app, a Swiss neo-digital bank, about the risk of crypto.

Focus has shifted from risk to regulation

According to Mr. Denisenko, the ESRB’s report illustrates a thorough understanding of the crypto and DeFi landscape, highlighting the necessity for vigilance. For instance, while the ECB has warned of the potential systemic risk of cryptocurrencies, the ESRB goes a step further. It suggests regulatory considerations for smart contracts and crypto conglomerates, which is a sign that the focus – and the overall level of attention – has shifted.

Retail investor risk is not systemic

The influence of crypto and DeFi on the broader financial ecosystem remains limited, despite their exponential growth.That’s not to discount the fact that individual investors can experience significant risks, but these have not yet escalated to a level of systemic concern.

Future factors in crypto market development

If traditional financial institutions continue to integrate and adopt crypto, the broader financial system may become more susceptible to crypto market turbulence.

The Markets in Crypto Assets regulation (MiCA), which is due to take effect in 2024, will likely bring significant changes too.

Scandals in the EU are to be avoided at all costs

The ESRB’s concern around “exponential growth dynamics” creating systemic risks is a clear call for the crypto and fintech sectors to maintain vigilance, monitor market developments, and ensure rigorous risk management.

In this regard, it is really up to the industry to ensure a “clean house”. Having a major scandal in the European Union (possibly one similar in kind to the FTX implosion) could push regulators to tighten the reins, endangering the further growth and development of the sector.

As we navigate this rapidly evolving industry, it’s crucial that we balance innovation with due diligence to prevent systemic shocks.