May 19, 2024
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EU Faces Concentration Risks in Crypto Trading, ESMA Reports

On April 10, the European Securities and Markets Authority (ESMA) issued a report highlighting the highly concentrated nature of cryptocurrency trading and the potential risks it poses to the broader financial ecosystem.

The report comes as the European Union (EU) prepares to implement MiCA, the world’s first extensive regulatory framework for cryptocurrency assets.

Market Dominance and Risks

ESMA’s research reveals that approximately 90% of cryptocurrency transactions are processed by just 10 exchanges, with Binance leading the pack, commanding half of the market.

While such concentration may enhance efficiency, it also raises concerns about the repercussions of a significant exchange failure or malfunction.

“The top 10 exchanges execute around 90% of total trading volume and, with a volume of over USD 3.7 trillion or a market share of 49%, Binance is the largest exchange. The runner-up, Upbit, recorded only about a seventh of this volume.”

ESMA report

Over time, this concentration has increased significantly, rising from 54% in 2019 to 73% according to ESMA’s latest data.

Limited Euro Presence and MiCA’s Potential Impact

Despite the impending MiCA regulation aimed at enhancing investor protection, the euro has a limited presence in cryptocurrency trading.

ESMA suggests that once MiCA is implemented in 2024, it could potentially drive growth in euro transactions. However, the distribution of fiat money in the market heavily relies on the U.S. dollar and the South Korean won.

Challenging Notions and Regulatory Framework

ESMA also challenges the idea that cryptocurrencies serve as safe havens during market stress, pointing out their correlation with equities and lack of stability relative to gold.

MiCA, first proposed in September 2020 and approved by the European Parliament in April 2023, aims to regulate all crypto assets not currently covered by EU traditional finance regulations, emphasizing the growing significance of the industry in the financial sector.

As the EU moves forward with the implementation of MiCA, ESMA’s findings emphasize the necessity of robust oversight and risk management in the rapidly evolving crypto sector.

Image from Wikimedia Commons

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