The European Securities and Markets Authority (ESMA) has issued a warning regarding the high concentration of trading activity on a limited number of cryptocurrency exchanges.
According to the regulator's analysisA single platform, Binance, controls about half of the entire market, while just 10 exchanges handle about 90% of all cryptocurrency transactions.
The ESMA report, published on Wednesday, also highlighted significant variations in market liquidity, with larger exchanges typically exhibiting higher levels of liquidity. While this concentration may offer efficiency benefits due to economies of scale, the regulator expressed considerable concerns about the potential implications of a failure or malfunction in a major asset or exchange for the broader crypto ecosystem.
ESMA's examination of fiat currencies used in the cryptocurrency market revealed a heavy reliance on the US dollar and South Korean won, while the euro plays a comparatively minor role, accounting for only around 10% of transactions. The regulator noted that the regulation of the Markets in Crypto Assets (MiCA) has not yet resulted in any observable increase in the use of the euro within the cryptocurrency market. However, ESMA expects that MiCA can potentially catalyze growth upon its implementation in 2024, given its focus on strengthening investor protection within the market.
"Cryptocurrencies are not a safe haven"
The regulator also questioned the notion of crypto assets serving as a safe haven during periods of broader market difficulties. The report identified a degree of co-movement between crypto assets and stocks, while highlighting the absence of a consistent relationship with gold, a traditionally recognized safe haven asset.
ESMA emphasized the inherent opacity of crypto transactions, making it difficult to identify their origin. However, a significant portion of crypto exchanges are located in jurisdictions characterized as tax havens. According to the regulator, approximately 55% of transactions take place on crypto exchanges licensed under the EU VASP framework, although a substantial proportion of these transactions likely occur outside the European Union.
The report also found that despite an increase in the number of actively traded crypto assets since 2020, the market remains highly concentrated. As of December 2023, just three cryptocurrencies โ Bitcoin (BTC), Ether (ETH) and the stablecoin Tether (USDT) โ account for a substantial 74% of the total market capitalization and 55% of the annual trading volume.
The report follows Ripple CEO Brad Garlinghouse's recent prediction that the total market capitalization of the crypto industry could double to $5 trillion by the end of 2023. In March, Bitcoin hit a new all-time high, surpassing $71,000 for the first timefollowing the UK Financial Conduct Authority's approval of cryptocurrency exchange-traded products.
The bullish trend gained momentum in January when the US securities regulator Spot Bitcoin ETFs Approved, a catalyst for the cryptocurrency's value, which surpassed $70,000 last week. Ethereum also crossed the $4,000 mark on Monday.
Cover image: Ideogram
