By Leonidas Stergiou
After the great spread of cryptocurrencies in the pandemic year 2020, their capitalization increased sevenfold in 2021, reaching 2.5 trillion. euro. At the same time, the creation of new cryptocurrencies is rapid, with 16 widespread in the Eurozone, with Bitcoin and Ether dominating.
According to a study by the ECB, which is 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. euro. This amount is considered manageable, however the growth rates of cryptocurrencies require immediate action – before the planned implementation of the relevant directive by the Commission in 2024.
The connection to 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 euros in cryptocurrencies, but the range is between 1,000 and 30,000 euros. Individuals and low- or high-income households have a particular preference, while demand is limited to middle-income ones. It is preferred mainly by young men. Most common are in Germany, France, Belgium, Spain, Italy and the Netherlands. According to another ECB study, in Greece, the penetration rate is below 1%.
Institutional investors: Demand is rising from institutional investors, as more than 56% of those surveyed by Fidelity Digital Assets say they plan to invest in cryptocurrencies compared to 45% in 2020. Germany, in July 2021, allowed institutional investors to maintain in their portfolios cryptocurrencies at a rate of up to 20%. It is also estimated that hedge funds will hold 7% of cryptocurrencies in seven years.
Other interfaces: The exposure of the Eurozone banking system to cryptocurrencies has increased significantly, mainly indirectly, through other services or institutional portfolios. Important is the interconnection of the banking system through payment systems, custodial services and investment platforms that have integrated cryptocurrencies as an alternative way of buying or investing for their customers. In addition, there is the possibility of leverage that exceeds 100 times, sharply increasing the risks.
The dangers
The risks associated with cryptocurrencies, according to the ECB, are related to the following parameters:
First, 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 medium (eg gold, currencies, etc.), such as stablecoins.
Third, lack of an institutional framework for control and protection of investors (rights, complaints, etc.).
Fourth, complex products that are associated with high leverage rates.
Fifth, they are used for scams (money laundering, cyber attacks, hacking, etc.).
Measures to be taken immediately
For these reasons, the ECB calls on the European Commission to speed up the MiCA Directive on the regulation of cryptocurrencies in Europe, which apparently will not be completed by the end of the year, which means that it will be implemented by the 2024.
For this reason, he calls on the competent supervisory authorities to act immediately to take action and regulate sub-sectors, such as investment funds, retail markets and investments through cryptocurrencies that are made with great leverage that exceed 100 times.
Source: Capital
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