The European Securities and Markets Authority (ESMA) has warned 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 about half of the entire market, while just 10 exchanges handle about 90% of all cryptocurrency trades.
ESMA’s report, published on Wednesday, also highlighted significant differences in market liquidity, with larger exchanges typically having higher levels of liquidity. While this concentration may provide efficiencies due to economies of scale, the regulator expressed significant concerns about the potential impact of a failure or malfunction of a major asset or exchange on the broader crypto ecosystem.
ESMA’s investigation into fiat currencies used in the crypto market revealed a heavy reliance on the US dollar and the South Korean won, with the euro playing a comparatively minor role, accounting for only around 10% of transactions. The regulator noted that the Regulation of Crypto Asset Markets (MiCA) has not yet resulted in a noticeable increase in the use of the euro in the cryptocurrency market. However, ESMA believes MiCA could potentially provide a boost to growth when it launches in 2024, given its focus on strengthening investor protection in the market.
“Crypto is not a safe haven”
The regulator also questioned the notion that crypto assets could serve as a safe haven during times of general market distress. The report noted a degree of coherence between crypto assets and stocks, while highlighting the lack of a consistent relationship with gold, a traditionally recognized safe haven.
ESMA highlighted the inherent opacity of crypto transactions, which makes it difficult to accurately determine their origin. However, a significant portion of crypto exchanges have been found to be located in jurisdictions that are considered tax havens. According to the regulator, approximately 55% of transactions occur on crypto exchanges licensed under the EU’s VASP framework, although a significant portion of these transactions are likely to take place outside the European Union.
The report also noted that the market remains highly concentrated despite an increase in the number of actively traded crypto assets since 2020. As of December 2023, just three cryptocurrencies – Bitcoin (BTC), Ether (ETH) and the stablecoin Tether (USDT) – account for a staggering 74% of total market capitalization and 55% of annual trading volume.
The report follows Ripple CEO Brad Garlinghouse’s recent prediction that the crypto industry’s total market cap 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. The UK Financial Conduct Authority approved cryptocurrency exchange-traded products.
The bullish trend gained momentum in January when the U.S. securities regulator approved spot Bitcoin ETFs, a catalyst for the cryptocurrency’s value to break $70,000 last week. Ethereum also crossed the $4,000 mark on Monday.
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