Financial stability is at risk as crypto-assets become more entangled with mainstream markets, the European Central Bank (ECB) said in its financial stability review on Tuesday (May 24).
The ECB pointed to the recent crashes of stablecoins Terra and Tether calling them not as “stable as their name suggests and cannot guarantee their peg at all times,” according to the report.
Tether, the world’s biggest stablecoin, dropped an estimated 9% in value since May 12 and lost more than $7 billion as investors pulled out amid a wider cryptocurrency selloff. Terra has been de-pegged from the USD since May 9.
See also: Tether Drops 9% in $7B Investor Selloff
The market capitalization of the crypto-asset space is an estimated seven times larger than it was two years ago, hitting a high of €2.5 trillion at the end of last year. It’s also more complex, expanding way beyond bitcoin, which erased more than half of its value since November’s record highs.
While the recent increase in volatility hasn’t affected the overall global financial system, as more institutional investors become involved, the threat will increase exponentially. The market capitalization of unbacked crypto-assets dropped €1.3 trillion since November 2021 without upsetting financial stability, the ECB said, but if the current situation continues, a “point will be reached” when that is not the case.
“Following a deep dive into crypto-asset leverage and crypto lending, we conclude that if the present trajectory of growth in the size and complexity of the crypto-asset ecosystem continues, and if financial institutions become increasingly involved with crypto-assets, then crypto-assets will pose a risk to financial stability,” per the report.
Read more: Crypto Is ‘Worth Nothing,’ Lagarde Declares, and Should Be Regulated
European Central Bank President Christine Lagarde said on a Dutch television show that cryptocurrencies are “worth nothing … based on nothing.”
She called on regulators to pass new rules to ensure people won’t risk their life savings on speculation when they have “no understanding of the risks.”
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One in 10 EU households could hold crypto assets, but most held less than €5,000, according to a recent ECB survey.
PYMNTS data shows that 41.2 million people in the U.S. now own at least one type of cryptocurrency and 16.1 million have used cryptocurrencies to make online purchases.
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