The European Central Bank said on Tuesday that if the emerging sector continues to grow and financial firms deepen their involvement, it will pose a risk to financial stability.
The price of cryptocurrencies fell sharply this month after the collapse of the major stable coin terraUSD. The crash has resulted in calls from the world's top financial leaders for a swift and comprehensive regulation of the sector.
Cryptocurrencies - historically a niche asset favoured by risk-hungry investors, exploded in size during the COVID - 19 epidemic. Institutional investors were particularly drawn to the claim thatbitcoin acts as a hedge against inflation and offers high returns in the face of low interest rates.
The sector hit a new peak of $2.9 trillion last November, up from less than $300 billion at the beginning of 2020. Since November, the value of the biggest token has fallen by half, dragging the value of the overall market down to around $1.2 trillion.
The ECB said in its biannual financial stability review that exposure tocryptocurrencies by banks and other financial institutions could put capital at risk and damage investor confidence, lending and financial markets.
It said that systemic risk increases in line with the level of interconnectedness between cryptocurrencies and the traditional financial sector.
The ECB noted that the highly leveraged trading offered by the exchanges has seen investors borrow funds to buy greater exposure tocryptocurrencies, as well as increasing financial stability risks.
Publications by data aggregation and criptocurrencies should be treated with caution, as data shortcomings in the sector are hindering the assessment of financial risks, it said.
Retail investors, long at the heart of the criptocurrency trading, have piled in, the ECB noted.
One in ten euro zone households have bought cryptocurrencies such asBitcoin, its Consumer Expectation Survey, which ran the poll in six countries.
The European Central Bank said the rules on criptomes were unsuitable for most retail investors and urged European Union authorities to approve new rules on cryptocurrencies as a matter of urgency. The rules, first published in September 2020, have not yet been agreed by the EU, and are not expected to be approved until 2024 at the earliest.