A European organization warns of a possible bank run on stablecoins

The European System Risk Board (ESRB) emphasizes that the increasing integration of the crypto sector with traditional currencies increases the risks of a possible unexpected crisis that could affect the global economy. That’s why the ESRB wants stricter regulation and supervision of the digital asset market.

Manage the crypto space

On May 25, the ESRB, the European Central Bank’s supervisory board, published report on crypto assets and decentralized finance (DeFi). The 77-page document highlights that the volatile crypto industry is growing and increasingly integrated with mainstream financial markets. Although the shocks of the past year in the crypto world have not caused the same damage as in the traditional financial sector (TradFi), the current risk monitoring system is not sufficient to identify all the worrying trends in the coming years.

The ESRB advocates using the European Union’s powers to regulate the crypto space and improve the relationship between this space and the wider financial market. To achieve this, it is proposed that the EU should develop standardized disclosure information from banks and investment funds involved in crypto.

Special focus on stablecoins

The report places special emphasis on stablecoins. It is the first to mention the speculative and high-risk phenomenon called “the run on the reserve-backed currency.” This makes sense, as stablecoin holdings can include government and private bonds, stocks, fiat currency, and other common assets. Showing the lack of transparency about these assets, the ESRB gives the example of Tether, whose market value has risen to $83 billion while little information is known about its reserves.

Regulators also note that the upcoming Pan-European law on markets in crypto-assets (MiCA) does not reach the so-called “crypto-asset conglomerates”. In the ESRB’s definition, conglomerates refer to crypto companies that perform different types of activities (such as security and trading) under one roof, such as Binance. Combining these activities carries risks, and the regulator is calling for regulators to investigate crypto-asset connections. It is worth noting that the proposals are still more moderate than calls from US regulators to address joint activities in the crypto sector.