The European Securities and Markets Authority (ESMA) warned that crypto markets are highly concentrated on April 10.
ESMA said concentration is a concern because a single asset or exchange failure could broadly impact the crypto ecosystem.
According to the agency’s findings, market capitalizations and trading volumes are “significantly concentrated” in a small number of assets across the crypto market.
Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) accounted for 74% of the crypto market cap in December 2023 and made up more than half of 2023’s annual trading volume.
Exchanges also demonstrated concentrated trading volumes, as just 10 platforms handled 90% of trading. Binance alone accounted for about half of all trading volume, though its dominance fell to 40% by December 2023 and has been on a steady decline overall since December 2022.
ESMA warned that individual cryptocurrencies are highly interconnected and show strong price correlations with each other. Furthermore, it described a positive correlation between crypto and equities, demonstrating risk plus a lack of a stable relationship with gold.
The agency said it does not consider crypto an effective “safe haven” in light of its analysis.
The EU perspective
Specific findings are particularly relevant to the EU’s regulatory activities. Of the 20% to 30% of crypto transactions involving fiat, 80% involved the US dollar or South Korean won. The euro played a “minor role,” accounting for about 10% of fiat transactions.
The euro’s involvement in fiat-crypto transactions did not increase even after the EU adopted the Markets in Crypto-Assets (MiCA) regulation in June 2023. However, ESMA said that MiCA rules could “constitute a potential growth driver” when implemented this year.
Exchange location is another issue. Although 55% of transactions occurred on exchanges with an EU Virtual Asset Service Provider (VASP) license, many of the same transactions occurred outside of the EU. About half of crypto trading volumes take place on exchanges based in tax havens, while Europe-based exchanges trading volume is almost non-existent.
ESMA said that MiCA will address location-related matters through disclosure requirements, improving transparency even as crypto exchanges expand to new jurisdictions.
The agency said that its research broadly “supports the implementation” of MiCA.
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