The European Securities and Markets Authority (ESMA) has published its report on trends, risks, and vulnerabilities in the EU markets during the first half of 2021 (1H21). Its takeaways included the argument that crypto markets’ extraordinary volatility and growth make a compelling case for the need for a targeted regulatory regime, as sketched out in the European Commission’s proposed Markets in Crypto-Assets regulations.
ESMA’s report notes that the economic outlook has continued to improve overall.
A lot has been riding on the EU and global market’s recovery during 1H21 amid the ongoing impact of the COVID-19 pandemic. ESMA’s report notes that the economic outlook has continued to improve overall. The European economy is now forecast to reach its pre-pandemic output by the end of 2022, earlier than expected. This recovery has been fueled by the relaxation of public health restrictions, some reduction in uncertainty, and central banks’ activism in providing supportive monetary policies. Cryptocurrencies have gained a lot of mainstream exposure this year, starting with Tesla’s move into bitcoin.
ESMA views crypto volatility in the first half of 2021 as an indication of “possible market exuberance.”
When it comes to the medium-term risks of the current climate, ESMA has taken the crypto markets as a bellwether of market sentiment and dynamics during the past six months: “Rising valuations across asset classes, massive price swings in crypto prices and event-driven risks observed in this year amid elevated trading volumes raise questions about increased risk-taking behavior and possible market exuberance.” In the ESMA’s view, this exuberance has been visible in the GameStop saga and the broader rise of social media-fueled retail trading, coupled with the huge price growth in crypto assets in the first quarter of this year.