Summary:
- The European Central Bank has published an informative new article on digital assets titled ‘Decrypting Financial Stability Risks in Crypto-Asset Markets’.
- The informative article describes the stablecoins of TerraUSD (UST) and Tether (USDT) as not being as stable as their names suggest and cannot guarantee their peg at all times.
- The article also concludes that the volatility of crypto markets could pose risks to financial stability.
The European Central Bank has published an article on digital assets amidst the current debate on their future, particularly in the European Union. The article, titled ‘Decrypting Financial Stability Risks in Crypto Asset Markets’, takes a deep dive into the crypto industry’s current developments, including the recent depegging of stablecoins such as UST and USDT.
Stablecoins Such as UST and USDT as Not as Stable As Their Names Suggest
According to the ECB, the risks to financial stability in the EU stemming from crypto assets were limited in the past. However, there is a need to discuss the risks and developments in stablecoins ‘as shown by the recent TerraUSD crash and Tether de-peg.’ These stablecoins ‘are not as stable as their name suggests and cannot guarantee their peg at all times.’
The Crypto-Verse Has Grown Dramatically Since 2020
Furthermore, the article by the ECB points out that the crypto-verse has increased dramatically in size and complexity since the end of 2020 and expanding beyond Bitcoin.
The crypto market capitalization has grown by roughly seven times than it was at the start of 2020. The article points out that trade volumes of cryptocurrencies have sometimes exceeded those of traditional exchanges such as the NYSE. It states:
Trading volumes for the most representative crypto-assets (including Bitcoin, Ether and Tether) have at times been comparable with or even surpassed those of the New York Stock Exchange or euro area sovereign bond quarterly trading volumes.
There are now more than 16,000 crypto-assets in existence (ten new crypto-assets are launched every day on average), although only around 25 crypto-assets have a market capitalisation comparable with that of a large cap equity.
Crypto Markets are Evolving Rapidly And Might Cause risks to Financial Stability
In the concluding segment of the article, the team at ECB made the following observations about the crypto industry.
- The nature and scale of the crypto markets continue to evolve at a rapid rate. If the current trend continues, cryptocurrencies could pose risks to financial stability.
- The interconnectedness between the traditional financial sector and the crypto markets means that systemic risks will increase with the use of leverage and lending activities.
- Regulation of cryptocurrencies should be a priority by the European Union.