The European Union’s securities regulator 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. An analysis by the European Securities and Markets Authority revealed that 10 exchanges handle about 90% of all cryptocurrency trades, with larger exchanges exhibiting higher levels of liquidity. The regulator expressed concerns about the implications of a failure or malfunction at a major asset or exchange for the wider crypto ecosystem.
The report also highlighted a strong dependence on USD and the South Korean won within the crypto market, while the Euro plays a comparatively insignificant role, accounting for only about 10% of transactions. Despite the lack of impact so far, the ESMA anticipates that the Markets in Crypto Assets (MiCA) regulation, set to be implemented in 2024, could potentially boost the use of the Euro within the cryptocurrency market by focusing on strengthening investor protection.
The ESMA disputed the notion of crypto assets serving as a safe haven during market distress, highlighting a degree of co-movement between crypto assets and equities, as well as the inconsistent relationship with gold, a traditional safe-haven asset. The report also pointed out the challenges in identifying the origin of crypto transactions due to their inherent opacity, with a significant number of crypto exchanges operating in jurisdictions known as tax havens. While 55% of transactions occur on EU-licensed exchanges, a substantial portion likely takes place outside the European Union.
Despite an increase in the number of actively traded crypto assets since 2020, the market remains highly concentrated, with Bitcoin, Ether, and Tether comprising 74% of the total market capitalization and 55% of the annual trading volume as of December 2023. The ESMA underscored the dominance of these three cryptocurrencies and the challenges posed by the lack of diversification within the market. The regulator called attention to the need for greater transparency and regulation in the crypto space to address the risks associated with concentration and potential market vulnerabilities.
