With new EU crypto legislation currently being drafted behind closed doors, it's interesting to take a look at the European Central Bank's (ECB) research paper that just came out: Financial Stability Review. What does it say about crypto?

MiCA (Markets in Crypto Assets) is the law that will determine the fate of crypto in Europe in the coming years. Sometime the coming summer the law will probably get its final form, after which it will take eighteen months before the regulations actually have to be implemented. The law is going to affect crypto companies and investors in Europe.

A major concern of the crypto world is how the EU will deal with stablecoins after MiCA. There are signs that stablecoins will get a hard time. Probably simply because they are a competitor to the EU's upcoming CBDC. The fact that you can get interest on your stablecoins and not on your euros obviously makes stablecoins a formidable competitor.

Another concern is that the EU will set high legal or financial thresholds for crypto startups. If they have to pay millions to get a license, this would be killing for the industry in Europe.

A few key points from the Financial Stability Review

So, considering we're in the run-up to the new law, let's see what the ECB says in its Financial Stability Review. What are the main points from this paper and what can we deduce from it (inspired by this overview by journalist Patrick Hansen)?

• The trading volume of crypto was at times higher than that of the New York Stock Exchange or the European bond market.
• The volatility of prices has so far not led to "contagion" of traditional financial institutions. Should the crypto market become much larger, this is conceivable.
• Given the above, there is an urgent need for regulation. At that point, European banks and financial institutions will also start offering crypto services.
• Crypto (lending) platforms may come under existing financial legislation. Decentralized Finance must also be careful to comply with EU regulations.

Many bears, few opportunities

The report shows the urgency the ECB feels to regulate crypto. The Bank clearly feels the looming presence of an emerging financial system. There is some pretty menacing language in the report about the risks to investors and to platforms that don't comply with future rules. It is just ironic that this 'review' actually barely mentions the opportunities that crypto offers...