European Central Bank warns of threats to financial stability from cryptocurrencies

After the huge fall in the crypto market over the past few weeks, there has been increased apprehension from the regulators regarding cryptocurrencies. In this episode, the European Central Bank (ECB) has also warned about the crypto market. The ECB says that if this segment maintains its rapid growth in the last two years and firms belonging to the finance sector have a higher stake in it, then it will be a threat to financial stability.

Investors with risk appetite are more interested in cryptocurrencies. The size of this market increased rapidly during the Corona epidemic. Institutional investors had invested a lot of funds in this as they believed that bitcoin could act as a hedge against inflation and had the potential to yield higher returns. These investors increased their share in the crypto market due to low interest rates. In November last year, the crypto market made a high level of about $3 trillion. However, since then the price of the biggest cryptocurrency, Bitcoin, has dropped to less than half. Due to this, the total crypto market has also fallen to about $ 1.2 trillion.

ECB In its Financial Stability Review, Banks and other Financial Institutions (FIIs) to participate in this market in a big way could put capital at risk and would be negative for investor confidence, lending and financial markets. The ECB pointed out that crypto exchanges offer trading facilities with higher lending. Because of this, investors tend to buy more cryptocurrencies by borrowing funds. This is a big risk to financial stability. By one estimate, one out of every 10 households in Europe has a cryptocurrency like bitcoin. The ECB believes that retail investors should stay away from cryptocurrencies.

Along with this, the ECB has requested the authorities of the European Union to approve the new rules on crypto assets soon. There is no consensus in the European Union on these rules. Because of this, it is difficult to get them approved quickly. Even before this, in some countries, the regulators cryptocurrencies had expressed concern about In India, the Reserve Bank of India (RBI) had demanded a ban on cryptocurrencies. However, the central government says that it will not ban this segment completely.
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