European Union authorities should curb leveraged bets on crypto assets by introducing limits for investment funds, exchanges and other firms to stop shocks in that industry from jeopardising financial stability elsewhere, an EU watchdog said on Thursday (May 25, 2023).
It was one of several recommendations made by the European Systemic Risk Board, which ranged from demanding regular reports from all companies involved with crypto assets to introducing specific rules for the largest firms in that space.
It follows a tumultuous 18 months for that industry, during which the price of bitcoin dropped as much as 77%, the cryptocurrency Luna collapsed and exchange FTX went from buying Super Bowl ads to landing into bankruptcy.
“Systemic risks could arise quickly and suddenly,” the ESRB said in a report. “If the rapid growth trends observed in recent years were to continue, crypto-assets could pose risks to financial stability.”
In a proposed change from recently passed EU regulation, the ESRB proposed “introducing leverage limits for investment funds exposed to crypto-assets”.
It also called for limiting crypto firms’ ability to lend tokens to their clients, which is one way of making leveraged bets, and for setting higher collateral requirements for distributed finance products and stablecoins.
The ESRB’s recommendations are not binding but they are likely to inform the EU’s future work on new versions of its markets in cryptoassets regulation (MiCA).