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Crypto and DeFi Are “Real Risks” Warns ECB President Lagarde

Christine Lagarde
Christine Lagarde

In statements to the European Parliament this week, the president of the European Central Bank, Christine Lagarde pushed for the need of regulating various crypto activities like staking and lending.

Lagarde also a chair of the European Systemic Risk Board (ESRB), claimed that the proposed regulation narrowly defines crypto-assets and that future law should govern the operations of lending and staking crypto assets, which are clearly increasing by the day.

Lagarde warns of the dangers of innovating these unknown and unfamiliar sectors which will put investors in a higher risk. With the absence of regulation fraudulent activities are carried out on a daily basis among other criminal acts.

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Market Crash Sparks Inquiries

Her comments come after the massive downfall of the crypto market in which one of the markets’ lending companies Celsius issues a statement informing about the suspension of withdrawals for all its users. This update by Celsius sparked a chain of inquiries from state securities authorities in the United States.

Babel Finance, another crypto loan business, halted withdrawals a few days later, citing liquidity challenges.

There is a need to continue to monitor the horizon for key threats and structural trends influencing the EU financial system, warns Lagarde, adding that more discussions on financial stability problems pertaining to crypto-assets will take place during the week.

The MiCA Regulation (Markets in Crypto-assets) is a regulatory framework that was proposed in September 2020 and adopted in March 2022. It establishes guidelines for how cryptocurrency investments should be managed inside the European Union.

According to Lagarde, MiCA will most likely not be introduced until 2024. The ECB president also warned that greater regulation will be required if bitcoin market practices change over time.

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She went on to say that it’s a far way away given the pace with which market values, inventiveness, and greed influence advances in the cryptocurrency business.

Current Regulation Framework Loopholes

The present MiCA regulatory framework concentrates on financial intermediaries such as banks and therefore does not pertain to decentralized currencies such as Bitcoin, which the European Parliament aims to solve in future rules that encompass assets with no identifiable issuer, according to Lagarde.

During a meeting of the European Parliament, French economists and European Parliament member Aurore Lalucq raised concerns about the liquidation of enterprises formed around cryptocurrency portfolios and how it would damage the EU’s financial stability.

Lagarde also mentioned that Crypto assets and decentralized finance have the potential to pose genuine hazards to financial stability.

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At present, there aren’t many connections between private-sector crypto assets and traditional finance.

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