The European Union’s securities regulator has raised concerns about the high concentration of trading activity on a limited number of crypto exchanges, with Binance controlling roughly half of the entire market. Analysis from the European Securities and Markets Authority (ESMA) revealed that just 10 exchanges handle about 90% of all cryptocurrency trades, with larger exchanges exhibiting higher levels of liquidity. The ESMA raised concerns about the implications of a failure or malfunction at a major asset or exchange for the wider crypto ecosystem.
An examination of fiat currencies used in the crypto market showed a strong dependence on USD and the South Korean won, with the Euro playing a comparatively insignificant role, accounting for about 10% of transactions. Despite the Markets in Crypto Assets (MiCA) regulation being in place, there has not been a noticeable increase in the use of the Euro within the cryptocurrency market. However, the ESMA anticipates that MiCA could act as a catalyst for growth upon its implementation in 2024 due to its focus on strengthening investor protection within the market.
The ESMA challenged the notion of crypto assets acting as a safe haven during periods of broader market distress, as it identified a degree of co-movement between crypto assets and equities, and an inconsistent relationship with gold, a traditional safe-haven asset. The regulator also highlighted the challenge of tracking the origin of crypto transactions due to their inherent opacity, with a significant number of crypto exchanges being located in jurisdictions characterized as tax havens. While roughly 55% of transactions are conducted on crypto exchanges licensed under the EU’s VASP framework, a substantial portion of these transactions likely occur outside the European Union.
Despite an increase in the number of actively traded crypto assets since 2020, the market remains highly concentrated, with just three cryptocurrencies – Bitcoin, Ether, and Tether – comprising a substantial 74% of the total market capitalization and 55% of the annual trading volume as of December 2023. The ESMA’s report highlights the dominance of these three cryptocurrencies in the market despite the proliferation of new assets. The regulator raised concerns about the lack of diversification in the market and the potential risks associated with such high levels of concentration, particularly regarding the impact of a malfunction or failure at a major asset or exchange.
In conclusion, the ESMA’s report sheds light on the challenges and risks posed by the high concentration of trading activity on a limited number of crypto exchanges, the lack of diversification in the market, and the potential implications of a failure or malfunction at a major asset or exchange. The regulator also highlights the role of the Euro in the cryptocurrency market, the impact of the MiCA regulation on market dynamics, and the challenge of tracking the origin of crypto transactions. Moving forward, the ESMA anticipates that MiCA could act as a catalyst for growth and investor protection within the market upon its implementation in 2024.
