Crypto assets pose minimal financial stability risk

The European Securities and Markets Authority (ESMA) has stated that crypto assets currently pose no significant risk to financial stability due to their relatively small size and limited integration with traditional financial systems.

As of April 9, the crypto asset market capitalisation was approximately $2.45 trillion, representing only about 1% of global financial assets.

ESMA Executive Director Natasha Cazenave emphasised that crypto assets are not widely used in critical financial services like payments, which reduces their potential to disrupt financial markets.

While some concerns exist about crypto funds and derivatives transmitting risk between crypto and traditional markets, their small size mitigates these risks.

However, Cazenave noted that as EU residents increase their adoption of crypto assets, the risk to financial stability will grow.

Stablecoins, in particular, require continuous monitoring due to the potential for depegging or a run on these assets, which could impact the financial assets backing them.

Under the EU's Markets in Crypto Assets (MiCA) legislation, stablecoin issuers face stringent regulations, including prudential and governance rules, to address these risks.

Cazenave highlighted the importance of international regulatory collaboration to ensure appropriate safeguards are in place globally to protect financial stability.

Despite these measures, ESMA remains cautious, emphasising the need for ongoing monitoring as crypto's ties to traditional finance deepen.

While the current threat is minimal, the potential for future instability remains, especially during market shocks.