A section of financial experts and economists are concerned that Crypto bears could adversely affect the financial system. Despite data showing that this could not be further from the truth, the European Central Bank (ECB) has conducted a study to unravel the impact of Crypto assets in financial systems.
The EU premiere bank believes that Crypto assets are risky, and a bear market could shake up the financial system. Its study, however, contradicts this conclusion since the results prove that the Crypto bears that started in November 2021 have had an insignificant effect on the financial system despite the market capitalization shedding off more than $1.3 trillion since November 2021.
Traditional Finance and Decentralized Finance Are Becoming Intertwined
The genesis of the ECB concerns and risk alertness stems from the fact that TradeFi and DeFi have increasingly become interlinked in the past few years. With institutional investors such as banks and venture capitalists being the leading investors, a plunge in the market capitalization to the current $1.2 trillion is deemed an existential risk to the stability of the financial market.
However, the ECB reports show that financial institutions are witty and prudential, and they mainly trade in derivatives and other regulated crypto instruments. On the other hand, payment platforms facilitate Crypto and NFT transactions without holding them, which cushions their exposure in a red market.
Crypto Adoption Is on The Rise at Retail and Institutional Levels
The ECB projects that 10% of EU households may be Crypto investors. The study further shows that the average investment is less than 5000 Euros. On the other hand, the US Federal Reserve survey found that 12% of US citizens have transacted in Crypto or held them. This can be proven by the recent revelation that showed how Tether investors redeemed $10 billion of their investments as of March 2022.
Moreover, more investors seek crypto-backed credit in the EU, and DeFi platforms reported a trading volume exceeding 70 billion Euros in the region.
From the institutional perspective, Banks in Germany-the largest economy in the EU, are allowed to hold at most 20% of their assets in Crypto.
Global-Regulation of Crypto Assets Is Being Mooted
Crypto adoption is rising at a meteoric pace, and regulators are playing catch up in a market evolving at break-neck speed. Even though the ECB president Christine Lagarde has an anti-crypto stance, the ECB is liaising with the EU parliament to create legislation to regulate the market without a total ban, as seen in some jurisdictions. The law is expected to come into force post-2024 despite the ECB terming the Crypto regulation as long overdue.
In the meantime, the Crypto market is in the red as the bears overcome the market bulls prevailing on Monday.