The European Union’s financial stability watchdog said new regulations may be needed to cover large crypto conglomerates and smart contracts as the growing digital assets and DeFi sector could pose systemic risks to the economy.
With the new Markets in Crypto-Assets (MiCA) regulation set to come into effect across the European Union in 2024, the European Systemic Risk Board (ESRB), chaired by EU Central Bank President Christine Lagarde, warned in a report Thursday about the risks of crypto lending and staking, as well as high leverage in digital asset markets.
Under one policy option, “DeFi developers could be required to comply with specific regulations involving the design and creation of smart contracts,” the report said. It raised the possibility of mandatory code audits, intellectual property restrictions and rules for oracles that transmit real-world data to automated software.
While MiCA sets governance, licensing and reserve requirements for players such as wallet providers and stablecoin issuers, it omits areas such as crypto lending and staking, which the report warns could “pose significant risks to consumers.” Under MiCA, firms will have to manage conflicts of interest between their business lines, but the ESRB said there is no overarching requirement to identify and mitigate operational or reputational risks that could arise from providing services such as trading and custody.
“The activities of large EU cryptocurrency companies should be studied taking into account any market developments, as well as the experience gained from applying MiCA,” the report said, citing existing payments laws that mean regulators could force risk services to be spun off to a separate subsidiary.
“While the past year has been a turbulent year for crypto assets and DeFi, systemic impacts have not yet materialized,” the report said, adding that “exponential growth dynamics” could mean future turbulence could pose a significant threat similar to the 2008 Lehman Brothers bankruptcy.
In March, the ESRB said fintech companies could face bank-style lending caps to prevent the crypto market from overheating, citing rising enthusiasm for cryptocurrencies. (CoinDesk)