The European Securities and Markets Authority (ESMA) has published its report on trends, risks and weaknesses in the EU markets for the first half of 2021 (1H21).
Findings include the argument that the volatility and unusual growth of the cryptocurrency market are a compelling argument for the need for a targeted regulatory mechanism as outlined in the European Commission’s proposed Crypto Assets regulations.
Much of the recovery in the EU and world markets in the first half of 21 was due to the impact of the ongoing COVID-19 pandemic. The ESMA report notes that the overall economic outlook continues to improve, with the European economy now expected to reach pre-pandemic production earlier than expected by the end of 2022.
This recovery has been fueled by the easing of public health restrictions, the reduction in uncertainty and the aggressiveness of central banks in providing supportive monetary policies. Regarding the medium-term risks of the current environment, ESMA has viewed the crypto market as the common foundation of market sentiment and dynamics over the past six months:
“Increased valuations in all asset classes, large price movements in cryptocurrencies and risks from events that were observed in the first half of 21 with high trading volumes raise questions about acceptance behavior.” Accept an increased risk and the possibility of market growth. “
This excellence, according to ESMA, was evident in GameStop’s history and the wider rise of social media-based retailing along with the massive growth in the price of investments in the first quarter of this year. The report highlights that much of this increased trading activity is taking place outside of EU regulation, raising investor protection concerns.
ESMA attributes the growing consumer confidence during this period to a number of factors including innovative new business models and highly regarded features of online trading platforms and mobile devices. In parallel with the retail boom, ESMA is keeping an eye on decentralized funding (DeFi), noting that the € 47 billion ($ 55.3 billion) tied up in DeFi in early September has declined but increased by 1,200%. from the end of July 2020.
Recognizing the benefits of DeFi, including zero-middle intermediaries, 24/7 availability and censorship resistance, ESMA noted the increasing use of stablecoins and digital currencies by ESMA, with central banks likely to become the boundary between traditional finance and DeFi make it more permeable over time. However, due to the initiative of institutional investors in particular, ESMA believes that DeFi risks will spread to the real economy more and more likely, even if the market is still small for the time being.
Related: EU securities regulator warns of risks from “unregulated” cryptocurrencies
The report also notes that institutional investors are starting to study the environmental impact of Bitcoin (BTC) in terms of their ESG goals, fueling the growing interest in Ether (ETH). Apart from ecological references, ESMA attributes the success of ETH to its smart contract functionality, the DeFi boom and the role of the blockchain in the pristine token ecosystem.
The regulator’s assessment was confirmed by Dan Morehead, CEO of Pantera Capital, who argued this summer that a blockchain upgrade will likely help Ether overtake Bitcoin as the main cryptocurrency.