The European Central Bank (ECB) issued a report on Tuesday expressing concerns about the involvement of financial institutions in the crypto industry.

ECB warns that crypto risks may spill over

With the recent collapse of TerraUSD (UST) in mind, the ECB released a report delving deeper into the risks of cryptocurrencies. The report appears to respond to European institutions’ growing interest in cryptocurrencies. It claims that, while this is not currently the case, if current growth and market integration trends continue, crypto-assets will potentially harm financial stability.

One example cited in the research is that crypto exchanges provide futures contracts and options, allowing investors to increase their exposure to crypto-asset returns synthetically, contributing to the volatility. In addition, the ECB also believes that because major payment networks have increased their support for crypto-asset services, the economy’s risk increases due to interconnection.

Regulations

The European Union is currently drafting regulations to oversee cryptocurrencies known as the Markets in Crypto Assets (MiCA) Regulation. The package aims to streamline crypto company expansion across the EU’s 27 member countries, and it includes a wide range of laws for crypto issuers and service providers.

“The MiCA Regulation should be approved by the co-legislators as a matter of urgency to ensure it is applied sooner rather than later,” the ECB said

The ECB argues in the report that implementing MiCA Regulation will increase interconnectedness. It argues that the EU should carefully consider any additional steps that allow the traditional financial sector to increase its interconnectedness with the crypto-asset market space.