The European Securities and Markets Authority (ESMA) has drawn attention to the highly concentrated nature of cryptocurrency trading and the potential risks it poses to the broader financial system.
According to ESMA’s research, approximately 90% of cryptocurrency transactions are handled by just 10 exchanges. The largest of these is Binance, which controls half of the market.
While this concentration may bring about efficiency, it also raises concerns about the potential consequences of a significant exchange failure or malfunction.
ESMA expressed worry about the concentration because the failure of a single asset or exchange could have far-reaching effects on the entire cryptocurrency ecosystem. The authority stated in its report:
“However, over time, this concentration has increased. In 2019, it stood at 54%, and according to ESMA’s latest data, it has now risen to 73%.”
The report also highlights that the euro has limited involvement in cryptocurrency trading, despite the introduction of the MiCA regulation, which is set to become the world’s most extensive regulatory framework for crypto assets. However, once implemented in 2024, it could potentially drive growth by enhancing investor protection. ESMA explained:
“Additionally, ESMA disputes the notion that cryptocurrencies act as safe havens during times of market stress, pointing out their correlation with equities and their lack of stability compared to gold.”
MiCA, which was initially proposed in September 2020 and approved by the European Parliament in April 2023, aims to bring about a new era of regulation for crypto assets, highlighting the increasing significance of the industry in the financial sector. It applies to all types of crypto assets, including securities and e-money, which are currently not covered by traditional EU financial regulations.
As the EU moves forward with the implementation of its comprehensive regulatory framework for crypto assets – MiCA, ESMA’s findings emphasize the importance of oversight and risk management in this rapidly evolving sector.
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