tl;dr
EU financial regulators are cautioning that potential US crypto deregulation could lead to global financial instability. The European Supervisory Authorities highlight the risk posed by rising crypto valuations driven by US policy expectations. They express concern about increased exposure to US mar...
European Union financial regulators are warning about the potential risks of rising cryptocurrency valuations, fueled by expectations of deregulation in the United States. The European Supervisory Authorities are concerned about the destabilizing impact of geopolitical fragmentation, policy uncertainty in the US, and volatility in the digital asset market. They highlight the increased exposure to US markets, the risks of shocks to funds with a liquidity mismatch, and the potential for disproportionate market reactions. The regulators also emphasize the fragmented oversight, systemic vulnerabilities, and the need for financial institutions to prepare for crypto-related risks. They urge institutions to stay alert to policy-driven market shifts and incorporate crypto-related risks into their scenario analysis.
The European Supervisory Authorities also express worry about the growing cross-border exposure to US markets, especially in equity fund flows and allocations by insurers and pension funds. They highlight the risks posed by the combination of rising cross-border exposure, growing leverage in alternative investment funds, and crypto speculation. Additionally, they warn about potential disproportionate reactions to surprises in the market, driven by record high US stock valuations and historically low EU corporate bond spreads.
The report by the Joint Committee of the European Supervisory Authorities also points out the risks posed by fragmented oversight and systemic vulnerabilities, particularly in the context of diverging regulations between different jurisdictions. The authorities call on financial institutions to be prepared for risks, enhance their risk frameworks, and incorporate crypto-related risks into their scenario analysis. They also emphasize the need for adequate provisioning and recovery plans.
While the EU has been working on its own regulatory framework for cryptocurrencies, the ESAs are concerned that a deregulatory push in the US could undermine those efforts and create arbitrage opportunities that destabilize markets. They stress the importance of vigilance as the crypto sector continues to expand, and they caution that the market could face heightened volatility if geopolitical uncertainty persists.