Crypto compounds with banks are a threat to financial stability, says the ECB

The deepening of the relationships of the crypto industry to banks and asset managers will be a risk of financial stability, warned the European central bank as the latest signs of how central banks and governments strengthen its market observation.

The ECB said on Tuesday that it "took a deep insight into the leverage of crypto-assets and the crypto loan" and found that these activities were more risky, complex and with traditional institutions.

"Investors were able to cope with the decline in market capitalization of unreasonable crypto systems by 1.3 trillion euros since November 2021 without being risks to take the financial stability," said the ECB. "At this pace, however, a point is reached at which non -secured cryptoassets pose a risk of financial stability."

The first such warning of the ECB, which was published as part of its semi-annual review of financial stability, followed similar messages by US and British authorities, which were unsettled by a number of recent failures on the cryptomarkt.

Bitcoin, the flagship cryptocurrency of the world, has halved its value since November and recently fallen under $ 30,000 for the first time since last summer. The most important stable coin of the market, Tether, temporarily lost its bond with the US dollar, while his rival terrausd almost collapsed.

US finance minister Janet Yellen recently warned that stablecoins recover the same risks as banking, and thus repeated a similar comparison of the Federal Reserve.

EZB President Christine Lagarde said on the weekend on the Dutch television that a crypto token was "nothing worth it, it is based on nothing, there is no underlying asset that could act as a security anchor". Fabio Panetta, an ECB manager, recently compared the sector with a "ponzi system" and called for a supervisory to avoid "lawless insanity of the risk of risks".

The central bank is working on a digital euro and intends to build a prototype for tests until next year before deciding on the introduction three years later. Lagarde said that its own digital currency supported by the Central Bank would "be very different from many of these things".

The connections between banks of the euro zone and crypto-assets "were so far limited", said the ECB in its report on Tuesday and added: "Market contacts indicate a growing interest in 2021, mainly about extended portfolios or support services in connection with digital assets (including custody and trade services)".

Large payment networks "have strengthened their support for cryptoasset services" and institutional investors would "now also invest more general in Bitcoin and cryptoassets".

With indication that German institutional investment funds have been able to invest in crypto systems up to a fifth of their stocks since last year, it was said that such investments had been supported by the availability of crypto -based derivatives and listed securities.

The ECB also called risks from decentralized financing or Defi, in which cryptocurrency -based software programs offer financial services without the use of intermediaries such as banks.

"cryptocredits on Defi-platforms in 2021 grew by a factor of 14, while the blocked total value until recently at around 70 billion pledge, in which collateral for a loan can be pledged against another loan, increased the likelihood that leverage limits are exceeded.

Some crypto exchanges offer customers loans so that they can increase their commitment to 125 times their original investment, said the ECB. But "considerable information and data defects continued", which meant that "the full extent of possible infection channels with the traditional financial system cannot be completely determined".

According to a recently carried out ECB survey, up to one of ten EU households can "have crypto systems", although most of them had invested less than € 5,000 in the sector. Similarly, a Fed survey published on Monday showed that 12 percent of adults in the United States had or used cryptocurrencies in 2021.

The EU currently concludes laws that are known as markets for crypto-assets, but the ECB said that they would come into force at the earliest in 2024. "In view of the speed of crypto developments and increasing risks, it is important to urgently bring crypto-assets to the regulatory perimeter and to bring it under supervision," it said.

Additional reporting by Scott Chipolina in London