EU Watchdog Cautions Against Dominant Crypto Exchanges

The European Securities and Markets Authority (ESMA) has released a report highlighting the concentrated nature of cryptocurrency trading and the potential risks it poses to the broader financial ecosystem. The report comes as the European Union (EU) prepares to implement MiCA, the world’s first extensive regulatory framework for crypto assets. According to ESMA’s research, 90% of cryptocurrency transactions are processed by just 10 exchanges. The largest of these, Binance, commands half of the market. While this concentration may improve efficiency, it also raises concerns about the impact of a significant exchange failure or malfunction on the crypto ecosystem.

ESMA expressed concern about the concentration because a single asset or exchange failure could have widespread repercussions. The top 10 exchanges account for 90% of total trading volume, with Binance alone holding 49% market share. The second-largest exchange, Upbit, has only about one-seventh of Binance’s volume. This concentration has been growing over time, standing at 54% in 2019 and increasing to 73% according to ESMA’s latest data.

Despite the introduction of the MiCA regulation, the euro has a limited presence in cryptocurrency trading. The regulation, intended to enhance investor protection, could potentially drive euro transactions once implemented in 2024. Currently, the market relies heavily on the U.S. dollar and the South Korean won as on- and off-ramps, with the euro playing a minor role.

ESMA also refutes the idea that cryptocurrencies act as safe havens during times of market stress. They cite the correlation between cryptocurrencies and equities, as well as their lack of stability relative to gold. MiCA, which was first proposed in September 2020 and approved by the European Parliament in April 2023, aims to regulate crypto assets that are not currently covered by EU traditional finance regulations. It underscores the growing significance of the crypto industry in the financial sector.

ESMA’s findings emphasize the importance of oversight and risk management in the rapidly evolving crypto sector as the EU implements its comprehensive regulatory framework for crypto assets.