ESRB report on crypto-assets and decentralised finance

The European Systemic Risk Board (ESRB) has published a report highlighting trends and systemic risks associated with the crypto-asset ecosystem, with a particular focus on stablecoins, crypto-asset investment products and multi-function groups:

• The report notes that global stablecoin market capitalisation has more than doubled since the ESRB's previous assessment in May 2023, driven in part by U.S. policies promoting the adoption of U.S. dollar-denominated stablecoins. The ESRB flag policy challenges in ensuring that stablecoins issued outside the EU that are non-compliant with MiCAR are not widely used within the EU. The ESRB also flags financial stability risks posed by stablecoins jointly issued by EU and third-country entities, noting that such schemes are not explicitly addressed under the current Markets in Crypto-Assets Regulation (MiCAR).
• Crypto-asset investment products are also becoming more accessible to both institutional and retail investors, reflecting a deeper integration into mainstream finance. The ESRB notes that the crypto-services market is highly concentrated, especially for custodians, increasing spillover risks into traditional finance. Additionally, most crypto- investment product issuers are based outside the EU. The ESRB consider that greater transparency is needed regarding the connections between non-bank financial institutions and crypto firms.
• Regarding multi-function groups (MFGs), where crypto-asset products and services are offered by entities within the same group as other financial and non-financial firms, the report highlights supervisory challenges arising from opaque structures and cross-border regulatory arbitrage. The report proposes a taxonomy for classifying MFGs engaged in crypto-activities within the EU, including traditional financial groups and newer entrants such as crypto-focused groups, and highlights key areas for policy attention, focusing on the need to strengthen oversight and coordination, particularly for Category 1 and Category 2a MFGs, which currently dominate the crypto-asset market.

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