ESMA warns of crypto trading concentration on Binance

The European Securities and Markets Authority (ESMA) has issued a warning about the high concentration of trading activity on a limited number of cryptocurrency exchanges.

According to the regulator’s analysis, a single platform, Binance, controls roughly half of the entire market, while just 10 exchanges handle about 90% of all cryptocurrency trades.

The ESMA’s report, released 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 at a major asset or exchange for the wider crypto ecosystem.

The ESMA’s examination of the fiat currencies used within the crypto market revealed a strong dependence on the US dollar and the South Korean won, with the Euro playing a comparatively minor role, accounting for only about 10% of transactions. The regulator noted that the Markets in Crypto Assets (MiCA) regulation has not yet resulted in any observable increase in the use of the Euro within the cryptocurrency market. However, the ESMA expects that MiCA could potentially catalyze growth upon its implementation in 2024, given its focus on strengthening investor protection within the market.

“Crypto not a safe haven”

The regulator also challenged the notion of crypto assets serving as a safe haven during periods of broader market distress. The report identified a degree of co-movement between crypto assets and equities, while also highlighting the absence of a consistent relationship with gold, a traditionally recognized safe-haven asset.

The ESMA emphasized the inherent opacity of crypto transactions, which makes it challenging to pinpoint their origin. However, a significant portion of crypto exchanges are found to be situated in jurisdictions characterized as tax havens. According to the regulator, roughly 55% of transactions are conducted on crypto exchanges licensed under the EU’s 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 – Bitcoin (BTC), Ether (ETH), and the stablecoin Tether (USDT) – comprise 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 time, following the UK’s Financial Conduct Authority’s approval of cryptocurrency exchange-traded products.

The upward trend gained momentum in January when the US securities regulator approved spot Bitcoin ETFs, a catalyst for the cryptocurrency’s value, which breached $70,000 last week. Ethereum also crossed the $4,000 mark on Monday.

Featured image: Ideogram

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