The EU watchdog, the European Systemic Risk Board (ESRB), is recommending that crypto leverage be limited to avoid disrupting the financial stability of the wider market.
On several occasions, financial instability has occurred due to the collapse of firms following highly leveraged bets. As the businesses are unable to repay the debt, the wider market experiences a cash crunch, often resulting in a recession.
ESRB Recommends Limit to Crypto Leverage
According to Reuters, the watchdog wants authorities to limit leveraged bets in the crypto industry. He wants to impose limits mainly on investment funds, exchanges, and other businesses.
Even for retail investors, highly leveraged trades can result in an initial loss of capital. Such an event is called a liquidation. Due to the high volatility of crypto, traders lose millions in liquidation daily.
The screenshot below shows that traders lost over $82 million due to liquidations in the last 24 hours.
Has Japan’s Borders Saved Investors Since FTX Collapse?
The ESRB said, “Systematic risks can emerge quickly and suddenly. Should the rapid growth trends observed in recent years continue, crypto-assets could pose a threat to financial stability.”
Japan’s Financial Services Agency has already imposed similar limits on crypto leverage. 648/2012 Text relevant to the EEA Where investors cannot borrow more than twice their investment amount for leveraged trades.
Some believe that strict Japanese regulations are the reason behind Japanese entity FTX enabling withdrawals in February.
The ESRB is responsible for overseeing the wider market and mitigating systemic risks. However, the watchdog cannot directly enforce the limits on crypto leverage.
However, it can make recommendations to the EU regarding future versions of the Market for Crypto-Assets (MiCA) legislation.
Last week, all 27 EU members unanimously approved the MiCA rules, which are likely to come into force from July 2024.
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