EU regulator cautions about limited number of exchanges exerting control over cryptocurrency market

The European Securities and Markets Authority (ESMA) has drawn attention to the highly concentrated nature of cryptocurrency trading and the potential risks it poses to the wider financial ecosystem. The report, which was published on April 10, coincides with the European Union’s (EU) preparations to introduce MiCA, the world’s first extensive regulatory framework for crypto assets. According to ESMA’s research, approximately 90% of cryptocurrency transactions are conducted through just 10 exchanges, with Binance, the largest among them, commanding half of the market. While this concentration may enhance efficiency, it also raises concerns about the impact of a significant exchange failure or malfunction. ESMA expressed worry over this concentration, as a failure of a single asset or exchange could have far-reaching consequences for the crypto ecosystem. This concern is heightened by the fact that this concentration has increased over time, rising from 54% in 2019 to 73% as per ESMA’s latest data. The report also highlights the limited presence of the euro in cryptocurrency trading, despite the forthcoming implementation of MiCA regulation. However, once MiCA is in place in 2024, it could potentially drive growth as it aims to enhance investor protection. ESMA also disputes the idea that cryptocurrencies serve as safe havens during times of market stress, citing their correlation with equities and lack of stability compared to gold. MiCA, which was initially proposed in September 2020 and approved by the European Parliament in April 2023, seeks to establish a new era of regulation for crypto assets, emphasizing the growing importance of the industry in the financial sector. MiCA applies to all crypto assets, including securities and e-money, that are currently not subject to traditional EU financial regulations. As the EU introduces its comprehensive regulatory framework for crypto assets through MiCA, ESMA’s findings highlight the significance of oversight and risk management in this rapidly evolving sector.