The European Central Bank (ECB) has listed the crypto market among other “pockets of exuberance” that it says could exacerbate possible financial market downturns if economic recovery plans fail to live up to expectations.
This warning is part of the ECB’s November financial stability review published on Wednesday.
According to the report, investors continue to seek investment avenues that promise significantly higher yields on the back of declining interest rates and rising inflation. This trend, the bank argued in its report, has led to surging investment activity in market segments like crypto, junk bonds, and housing.
The ECB stated that such a situation could cause problems down the line especially if abrupt changes to global liquidity conditions were to occur.
“A correction in markets could be triggered by a weaker than expected economic recovery, spillovers from adverse developments in emerging market economies, a re-intensification of stress in the non-financial corporate sector or abrupt adjustments in market expectations regarding the prospective path of monetary policy normalisation,” the ECB stated in its report.
Concerning cryptocurrencies, the ECB warned that virtual currencies “remain subject to speculative bouts of volatility.”
Apart from issuing warnings about the possibility of a crypto market crash, the ECB also identified specific risks associated with stablecoins. According to the report, the growth of the stablecoin market has “strengthened” the links between the crypto space and traditional finance.
While adding that stablecoins currently pose “limited financial stability risks” in the Eurozone, Wednesday’s report called for urgent regulation given their rapid growth and utilization. In its earlier report back in May, the ECB stated that crypto assets on the whole did not pose any significant risks to the region’s financial stability.
Both cryptocurrency and stablecoin regulations are among the issues under consideration by the European Commission in its proposed Markets in Crypto Assets (MiCA) framework.