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- ESMA report talks about environmental cost, financial innovation, volatility in crypto prices
- EU policymakers were eager to put forward cryptocurrency regulations, new anti-money laundering rules, and tax reporting requirements
- Earlier this year, retail investors gathered to rally behind GameStop stock, leading to huge losses to new traders
European Securities and Markets Authority (ESMA) has published a new report 2021 financial innovation scoreboard under which crypto assets and distributed ledger technologies stand out.
It’s a 110-page report titled trends, risks and vulnerabilities. The report paints cryptocurrencies as a trending financial innovation as well as a threat to sustainable finance because of their high environmental cost, especially in crypto mining.
The report highlights that most crypto assets are highly volatile in price and operate outside of the European regulatory framework. Hence, the investor protection issue is high.
ESMA is an independent European Union authority dedicated to improving investor protection and promoting stable and orderly financial markets. The report gives priority to the financial innovation that requires deeper analysis and potential policy responses.
ESMA on new rules and regulations
The ESMA report was released when all the EU policymakers were eager to put forward cryptocurrency regulations, new anti-money laundering rules, and tax reporting requirements for virtual asset service providers and investors.
The report also mentions the rise in risk-taking behaviour and market exuberance to be blamed for increasing volatility in the equity market.
Earlier this year, retail investors gathered to rally behind GameStop stock, leading to huge losses to new traders as the price was doomed following the initial hype of the movement.
Evolving risk via Stablecoin
There will be a continuous risk to retail investors and institutional investors in future. Hence, it cautions against the risk surrounding crypto assets. Crypto marketplace capitalization fell nearly 40% in May, highlighting their excessive rate volatility.
The villain is the stable coin. EU’s upcoming markets in crypto assets (MICA) regulatory framework is designed to deal with those risks. The sweeping framework will be applicable in 27 member states. It includes restrictions on stable coins. It also requires stable coin issuers to own at least 3% of the coin’s reserves. Stable coins are not an EU favourite.
Market tendencies around non-public stablecoins stay under scrutiny with the aid of international regulators. The potential impact on the financial system could be seen by adopting stable coins. Hence, transparency and legal reality were reinforced.
Environmental cost
As per the report, sustainable finance is expanding in Europe with a 20% growth of environmental, social and governance fund assets and a 40% rise in outstanding sustainable debt instruments in 2020.
But the energy consumption of certain DLT protocols is a source of environmental concern. Since crypto mining is on the rise, this causes environmental issues- a cost of one particular innovation. Hence, the increasing pressure on global leaders and institutions to up their game against climate change, cryptocurrencies, particularly bitcoin have come under fire as it requires a large amount of energy to mine and maintain their networks.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
