The European Central Bank (ECB) has warned that cryptoassets pose a major risk to global financial stability in its bi-annual review.
The ECB review said that closer connections between the cryptoassets industry and banks could damage the global economy, with the recent ‘cryptocrash’ highlighting the volatility of digital assets.
The review warned that “systemic risk increases in line with the level of interconnectedness between cryptoassets and the traditional financial sector”. This is being exacerbated by increasing demand for cryptoasset investment, despite the associated risks, the ECB said.
There has been a clear demand from many major financial institutions to get involved with the crypto industry. Barclays and JP Morgan both participated in a funding round for UK-based cryptocurrency trading platform Elwood, which raised £57m in a Series A round earlier this month.
And beyond direct investment from financial institutions, the majority of major banks in the UK and beyond have in some way incorporated cryptocurrency into their list of services.
ECB crypto lending warning
While some traditional banks have blocked customers from purchasing cryptocurrency, others such as the Royal Bank of Scotland are more friendly to crypto transactions.
Challenger banks like Revolut go further, offering customers the opportunity to buy and sell crypto assets via its platform.
The ECB’s warnings come as the cryptocurrency market faces a dramatic fall, with the crypto poster token Bitcoin dropping in value by more than half of its peak.
Prior to the recent ‘crypto crash’, the ECB found investments into crypto “have at times been comparable with or even surpassed those of the New York Stock Exchange or euro area sovereign bond quarterly trading volumes”.
The review also warns of a growing practice of “crypto lending”, which involves “investors earning interest on digital asset holdings by lending their assets out or borrowing against their digital asset holdings through overcollateralisation”.
The ECB said that while similar practices are conducted by banks with fiat currency, crypto lending is often done without any formal supervision or regulatory checks.
The full financial stability review from the ECB can be read here.