• Deborah

On October 4, the European Securities and Markets Authority published a risk analysis on crypto-assets and financial stability. Related financial stability risks were assessed with a view on criteria including the size of the crypto market relative to the traditional market and the interconnectedness (both direct and indirect).

Crypto-assets present diverse risks including its use on financial applications and infrastructures. The report identifies these risks in two categories and highlights features of crypto-assets that contribute to and exacerbate the risks:

1/Traditional financial risks such as speculative markets are exacerbated in crypto-assets resulting from a combination of:

  1. non-tangible value

  2. aggressive marketing by firms to the public

  3. development of increasingly complex products

  4. Leverage accessible through margin accounts on crypto-asset exchanges

2/Crypto-asset native risks

  1. Pseudonymity preventing assessments of creditworthiness or aggregate exposures

  2. Manipulation of consensus mechanisms of distributed ledger technologies (DLTs)

  3. Network congestion and other operational vulnerabilities

Connections between the traditional financial markets and crypto-asset systems create additional risks of transmission.

The report applies the ESMA risk monitoring framework to complete its assessment of crypto-asset risks, broken down into six risks:

  1. Liquidity

  2. Market

  3. Credit

  4. Internal contagion

  5. External contagion

  6. operational

In summary, ESMA recognizes the multiple risks of crypto-assets and their potential impacts on financial stability. As such, these assets will continue to be assessed within ESMA’s risk monitoring framework.

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