Crypto: Europe Warns Of Systemic Risks Despite MiCA

Cryptos have moved from being digital pariahs to serious investment products. However, as their volumes explode and banks begin to take notice, another dynamic sets in: that of institutional fear. Europe, which thought it had secured the ground with MiCA, is starting to doubt. A report from ESMA throws another coin into the worry machine: crypto could shake more than just a wallet.

ESMA’s Warning: Red Flags Amidst Euphoria

The European Securities and Markets Authority (ESMA), author of a recent debate on the MiCA law, is clear: the rise of crypto-assets, still limited to 1% of global financial assets, is no longer a niche game. With €3 trillion in cumulative market capitalization, the market is beginning to weigh in. Especially as the interconnections between crypto and traditional finance intensify: ETFs booming, stablecoins becoming an alternative payment system, and a growing influx of savers seeking yields.

And just to pour a bucket of cold water on this enthusiasm, ESMA reminds:

There is a real risk for investors of losing most, if not all, of their investment.

Add to this a still vivid memory of the FTX, Terra, and Celsius fiascos, and you get a cocktail conducive to another crisis. A crisis that no one will be able to say they did not see coming.

MiCA: The Cracked European Shield?

Adopted like a bulletproof vest, the MiCA regulation (Markets in Crypto-Assets) was supposed to provide a layer of protection for European savers. On paper, it regulates PSANs, imposes rules on stablecoin issuers, and introduces a cryptocurrency license at the EU level.

But in the corridors of ESMA, the observation is more nuanced: MiCA does not protect as much as MiFID II.

No obligation for aptitude testing for investors, few safeguards regarding advice, and timid regulation of stablecoins.

Roderik’s tweet (@r0derik) summarizes the fracture well:

The United States bans what Europe regulates.

The comparison with the American STABLE Act is striking: where Washington bans interest on stablecoins and prohibits algorithms for two years, Brussels opts for flexible regulation.

A more permissive philosophy… but riskier?

Strengthened Links with Traditional Finance: Towards a Systemic Risk?

By playing with matches, the fire ultimately takes hold. This is what ESMA fears, which views the bridges being built between crypto and traditional finance with suspicion. European banks, still hesitant for now, could be tempted by indirect exposure, via ETFs or derivatives. In the event of a failure in the crypto world, a domino effect cannot be ruled out.

As an unpleasant reminder, regulators mention the colossal losses suffered by retail investors during the market crash in 2022: -70% in one year. Not to mention the scams and manipulations, always omnipresent on unregulated platforms.

The ECB, in echo to ESMA, calls for enhanced oversight. Because today, crypto no longer just shakes currencies: it flirts with the core of the financial system.

Just last weekend, the crypto market was shining brightly. But ESMA, as a good European firefighter, prefers to remind that not all flames are beneficial. MiCA is not an absolute firewall, and the growing interconnections with traditional finance are awakening the ghosts of 2008. If Europe wants to avoid another systemic crisis, it is better to monitor these assets that are as seductive as they are volatile.