After the proliferation of cryptocurrencies in the pandemic year 2020, their capitalization increased sevenfold in 2021 to €2.5 trillion. At the same time, the creation of new cryptocurrencies has been rapid, with 16 cryptocurrencies prevalent in the Eurozone, with Bitcoin and Ethereum dominating.
According to an ECB study included in the Financial Stability Report published today, the direct and indirect exposure of the financial system to cryptocurrencies is estimated at €1.3 trillion.
This amount is considered manageable, but the rate of rise of cryptocurrencies calls for immediate action – earlier than the planned implementation of the directive by the Commission in 2024.
The interface with the financial system comes through the following channels:
Households, individuals
- The penetration rate of cryptocurrencies in European households is 10%.
- The average amount per household is estimated at less than €5,000 in cryptocurrencies, but the range is between €1,000 and €30,000.
- Individuals and low- and high-income households have a particular preference, while demand is limited to middle-income households.
- It is mainly preferred by young men.
- It is most widespread in Germany, France, Belgium, Spain, Italy, France, Belgium, Spain and the Netherlands.
- According to another ECB study, in Greece, the penetration rate is below 1%.
Institutional investors
- Demand is growing from institutional investors, as now over 56% surveyed by Fidelity Digital Assets said they are considering investing in cryptocurrencies, up from 45% in 2020.
- Germany, in July 2021, allowed institutional investors to hold up to 20% cryptocurrencies in their portfolios. It is also estimated that hedge funds will hold 7% of cryptocurrencies in seven years.
Other connections
- The Eurozone banking system’s exposure to cryptocurrencies has increased significantly, mainly indirectly through other services or institutional portfolios.
- Significant interconnection of the banking system through payment systems, custodian services and investment platforms that have incorporated cryptocurrencies as an alternative way for their customers to buy or invest in cryptocurrencies.
- In addition, the possibility for leverage of more than 100 times is given, sharply increasing the risks.
The risks
According to the ECB, the risks associated with cryptocurrencies are related to the following parameters:
- Firstly, they are highly volatile and vulnerable to misinformation and market manipulation due to a lack of transparency and liquidity.
- Second, their value is not linked to a reference instrument (e.g. gold, currencies, etc.), such as stablecoins.
- Thirdly, the absence of an institutional framework for investor control and protection (rights, complaints, etc.).
- Fourth, complex products which are associated with high leverage ratios.
- Fifth, they are used for fraud (money laundering, cyber attacks, hacking, etc.).
Immediate action
For these reasons, the ECB is calling on the European Commission to speed up the MiCA Directive, for the regulation of cryptocurrencies in Europe, which apparently will not be completed by the end of the year, meaning that it will be implemented from 2024.
For this reason, it calls on the relevant supervisory authorities to act immediately to take measures and regulate individual sectors, such as investment funds, retail markets and cryptocurrency investments made through highly leveraged investments of more than 100 times.
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