[Asia Economy Reporter Park Byung-hee] Voices warning about the risks of cryptocurrencies have been increasing following the collapse of the cryptocurrency Luna and the stablecoin Terra.
According to major foreign media on the 24th (local time), the European Central Bank (ECB) warned in its semi-annual financial stability report released that day that cryptocurrencies could pose systemic risks to the financial market.
The ECB stated that the cryptocurrency market has grown rapidly over the past two years and its connection with traditional financial institutions such as banks and asset management industries is deepening, which could undermine financial market stability.
The ECB pointed out that some cryptocurrency exchanges offer investors leverage up to 125 times their investment. However, due to a lack of critical information, it is difficult to fully understand how the existing financial system is linked to the cryptocurrency market and, consequently, how the cryptocurrency market affects the traditional financial market.
The ECB diagnosed that as the cryptocurrency market becomes increasingly risky and complex, its correlation with traditional financial institutions is growing, which increases systemic risks in the financial market.
This is the first time the ECB has warned about the risks of cryptocurrencies.
Following the collapse of Luna and Terra, warnings about the risks of the cryptocurrency market have intensified, and calls for financial authorities to swiftly regulate the market are growing louder.
ECB President Christine Lagarde appeared on Dutch television last weekend and pointed out that cryptocurrencies have no intrinsic value. Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), strongly criticized the structure of Luna and Terra as a multi-level pyramid scam at the World Economic Forum (WEF) held in Davos, Switzerland, on the 23rd (local time).
At the beginning of 2020, the market capitalization of cryptocurrencies was less than $300 billion, but it increased to $2.9 trillion in November last year before halving to the current level of about $1.2 trillion. Bitcoin prices also fell to less than half of their peak in November last year.
The ECB stated that one in ten households in the EU may hold cryptocurrencies, but most investment amounts are less than 5,000 euros. The U.S. Federal Reserve (Fed) also analyzed in a report released on the 23rd that about 12% of American adults held or used cryptocurrencies as of 2021.
The ECB said cryptocurrencies are not appropriate investment products for individual investors and urged EU financial authorities to urgently approve cryptocurrency regulation laws. The EU’s cryptocurrency regulation law, prepared in September 2020, has yet to receive approval from all member states.
The ECB expects the cryptocurrency regulation law to be implemented at the earliest in 2024 and emphasized the need to expedite legislation.
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