Crypto Is Innovative But Risky, European Regulator Says

A new report by the European Securities and Markets Authority (ESMA) calls cryptocurrency both a financial innovation and a possible threat due to the cost of crypto mining.

As CoinDesk reported on Friday (Sept. 10), the ESMA’s “Trends, Risks and Vulnerabilities” report says that crypto asset volatility, as well as the growing popularity of stablecoins, central bank digital currencies (CDBC) and decentralized finance (DeFi), are fueling growing risk across asset classes.

“Most crypto assets (CAs) are highly volatile in price and operate outside of the existing EU regulatory framework, which raises investor protection issues,” writes the ESMA, an independent authority within the EU.

CoinDesk notes that the report coincides with the EU’s exploration of new crypto regulations and anti-money laundering and tax reporting rules, as the European Central Bank prepares its investigation into the digital euro.

Read more: ECB Begins “Investigation Phase” of Digital Euro Project

As PYMNTS reported in July, the ECB expects its investigation to last two years. It will examine whether a digital euro can “meet the needs of Europeans while at the same time helping to prevent illicit activities and avoiding any undesirable impact on financial stability and monetary policy,” the organization said at the time.

For its part, the ESMA warns about the environmental concerns associated with the energy consumption of some distributed ledger technology (DLT) protocols.

“Innovation can support sustainability by addressing ESG information gaps through green financial technology (FinTech) solutions, but the environmental cost of one particular innovation – cryptocurrencies – is soaring,” the report said.

As world leaders face increased pressure to combat climate change, cryptocurrencies – bitcoin in particular – have been criticized for the massive amounts of energy needed to mine them and keep their networks running.

The ESMA report emphasized the rising prominence of DeFi and CBDCs.

“DeFi holds the same benefits as [the] blockchain technology on which it is built – namely, disintermediation, round-the-clock availability and censorship resistance,” the report says. “It also faces similar challenges and risks, including in relation to operational resilience, scalability and governance.”