The European Central Bank has published its financial stability report for 2021. The report, which conveys the economic outlook and risks of the countries after the pandemic, also includes determinations about cryptocurrencies.
The report, which drew attention to the growth in the crypto asset market, emphasized that the market maintains its speculative structure.
The following statements were used in the section on cryptocurrencies in the report:
“Financial asset price developments raise the possibility of market corrections, raising concerns of overvaluation in some markets. The combination of historically low real yields and high valuations has left sub-investment grade bonds and some equity markets vulnerable to adverse interest rate and growth shocks.
A weaker-than-expected economic recovery, spillovers from adverse developments in emerging market economies, re-intensification of stress in the non-financial corporate sector, or sudden adjustments in market expectations regarding the forward monetary policy path may trigger a correction in the markets.
Also, more persistent inflationary pressures than currently anticipated could push nominal yields higher, which could put valuations under pressure. Beyond core markets, some more exotic market segments, such as crypto-asset markets, continue to be subject to bouts of speculative volatility, with the growing popularity of stablecoins increasing the links between cryptoassets and traditional financial markets.
Crypto-asset markets have grown in importance and complexity, and their market cap is subject to bouts of speculation. The growing popularity of stablecoins has strengthened the links between cryptoassets and traditional financial markets.
In addition, the development of a crypto-based market infrastructure called “decentralized finance” (DeFi) has increased the complexity of crypto asset markets. DeFi typically involves the use of smart contracts covering financial services such as lending, insurance, crypto-assets exchange, derivatives platforms, and staking.”