Crypto Leverage ‘Is Only a Problem’ When it Impacts Traditional Finance: EU Watchdog

Crypto contagion risk is low today, but a European watchdog is keen to keep it that way.

A new report from the European Systemic Risk Board (ESRB) found that the industry’s economic impact is minimal, but recommends policy options that would allow EU bodies to better monitor the crypto sector and mitigate any risks.

Among other suggestions, such as actively monitoring contagion and education, the ESRB also highlighted the importance of monitoring leveraged trading in the crypto industry.

“Leverage in the crypto-asset world is only a problem if there are connections with the traditional financial system—something that needs to be monitored,” it read.

Daniel Weber, Directorate General of Communications for the European Central Bank, told Decrypt that “the most important takeaway is that, so far, the impact of cryptos on the financial systems was limited, due to only a few linkages. However, this could change as the sector is growing and highly volatile. Therefore it needs to be closely monitored.”

Assessing the state of crypto trading in Europe today, the European watchdog’s report also suggests that “coordination and cooperation” between Europe and countries abroad is crucial to ensuring that this economic impact does indeed stay low. This is due to the “cross-border nature” of cryptocurrencies, said the ESRB.

“The report is meant to inform the ongoing debates and provides suggestions on how to improve monitoring and risk assessment going forward,” Weber said, adding that could also add to the European Commission’s future review of MiCA.

This report comes just over a month after the EU Parliament passed Markets in Crypto Assets (MiCA), which sets a unified standard for crypto asset regulation across EU member states.

Regulatory bodies in the EU have been watching crypto markets and DeFi closely following a turbulent period for the industry.

In the last 18 months, a bear market brought down the price of Bitcoin by 77%, Luna’s primary developer was arrested in Montenegro on fraud charges, and the implosion of FTX caused a crisis of faith for many investors and customers.