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​​​​EU watchdog warns cryptocurrencies ‘could pose risks to financial stability’

​​​​EU watchdog warns cryptocurrencies ‘could pose risks to financial stability’

On Thursday, May 25, a European Union watchdog urged EU authorities to ban leveraged bets on crypto assets by establishing limitations for investment funds, cryptocurrency exchanges, and other enterprises to prevent shocks in that market from endangering financial stability elsewhere.

It was one of the European Systemic Risk Board’s (ERSB) many suggestions, which also included requiring periodic reporting from all organizations working with crypto assets and instituting new regulations for the industry’s major enterprises in its report.

It comes after a difficult 18 months for the sector, during which Bitcoin’s (BTC) price plunged over 70%, the cryptocurrency Luna collapsed, and the exchange FTX went from purchasing Super Bowl commercials to filing for bankruptcy.

The ESRB said in a report: “Systemic risks could arise quickly and suddenly. If the rapid growth trends observed in recent years were to continue, crypto-assets could pose risks to financial stability.”

Curbing crypto leverage limits

The ESRB also advocated “introducing leverage limits for investment funds exposed to crypto-assets” as a revision to a law that was only recently enacted by the EU.

It also recommended increasing the amount of collateral that must be provided for distributed finance products and stablecoins, as well as restricting the ability of cryptocurrency companies to lend tokens to their customers, which is one method by which leveraged bets may be made.

Although the ESRB’s suggestions do not have any legal weight, it is probable that they will be taken into consideration as the EU works on fresh iterations of its markets in Markets in Crypto Assets Regulation (MiCA). 

The news comes after Finbold’s report last week, which revealed the EU Council had adopted rules to collect crypto transaction data to give tax authorities.

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