There is no man-made system that does not come with its fair share of risks. As humans, we have learned to live with these risks either by accepting them or mitigating them. When the internet was created, there were different risks associated with using the technological innovation. Three decades later, the internet has become one of the most useful tools for a plethora of information-seeking purposes. Most times, to mitigate the risks associated with a system, authorities and agencies come up with regulatory policies.
ESMA And Cryptos
In different parts of the world, there is an increased interest in cryptocurrency, and Europe is one of those regions. Different European countries have shown their support for cryptocurrency by investments and adopting crypto payments. However, there are concerns about the risks associated with non-regulated cryptocurrencies.
The European Securities and Markets Authority (ESMA) is the authority responsible for the supervision and regulation of cryptocurrency in Europe. According to a publication by the ESMA; some analyses were made about the financial markets and COVID-19’s impact. The publication also talked about the risks associated with un-regulated cryptocurrencies that people are investing in.
The report mentioned that PayPal’s move into the crypto space facilitated mass interest in cryptocurrencies. PayPal’s CEO recently stated that there was a “big shift into cryptocurrencies.” These comments followed the companies move to offer 200M+ users the ability to use digital assets. Furthermore, the agency cited that the increased interest in digital assets also stemmed from the surging interest in DeFi protocols.
The ESMA mentioned that there was an increased demand for crypto by investors looking to get higher yields. In an environment where interest rates are historically low, traditional banks can not offer yield. In most scenarios, bank yields are not keeping up with annual inflation. By cutting out the middleman, many DeFi protocols have launched and are offer significantly higher yields than traditional finance.
It is important to note that the increasing volume of crypto assets has attracted more users to the market. The agency is warning users that the increased price of non-regulatory digital assets is risky to investors, and could crash. The agency believes that investors are underestimating the market’s high volatility.
ESMA And DeFi
ESMA talked about the growth of the decentralized finance (DeFi) industry. The report mentioned DeFi’s benefits including resistance to censorship, 24/7 trades, exclusion of 3rd parties, among others. They also cited the risks involved in DeFi investments including governance, scalability, and other operational factors.
The ESMA is monitoring the growth of the DeFi industry because they believe there could be regulatory issues later.
It is important to understand what you are getting into when dealing with digital assets that are not regulated. Investors must do their own research and understand where they are deploying risk capital. Past performance is not an indicator of future performance.
As the world aligns with the mainstream adoption of cryptocurrency, the paradigm shift in the finance industry cannot be stopped. Financial regulatory agencies need to inform people about the benefits and risks of crypto investments without bias.
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