EU Regulator Warns of Concentration on Few Crypto Exchanges

The European Union's securities regulator has cautioned about the high concentration of trading activity on a limited number of cryptocurrency exchanges. Binance, a single platform, controls roughly half of the entire market, the regulator stated on Wednesday.

Analysis from the European Securities and Markets Authority (ESMA) revealed that only 10 exchanges handle about 90% of all cryptocurrency trades. The report also noted significant variations in market liquidity, with larger exchanges exhibiting higher levels of liquidity.

"While this might be advantageous from an efficiency standpoint (due to economies of scale), it raises considerable concerns regarding the implications of a failure or malfunction at a major asset or exchange for the wider crypto ecosystem," the ESMA said.

Euro Adoption in Crypto Remains Low

An examination of fiat currencies used within the crypto market showed a strong reliance on USD and the South Korean won. In contrast, the Euro plays a minor role, accounting for about 10% of transactions.

The ESMA also 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, it expects MiCA to potentially drive growth upon its implementation in 2024, as it focuses on strengthening investor protection.

Challenge to Crypto's Safe-Haven Status

The ESMA disputed the notion of crypto assets acting as a safe haven during periods of broader market distress. Its report identified a correlation between crypto assets and equities, while noting the absence of a consistent relationship with gold, a traditional safe-haven asset.

Opacity of Crypto Transactions

The regulator highlighted the challenge of tracing the origin of crypto transactions due to their inherent opacity. Many crypto exchanges are located in jurisdictions characterized as tax havens, making it difficult to track their operations.

Dominance of Bitcoin, Ether, and Tether

Despite an increase in the number of actively traded crypto assets since 2020, the market remains heavily concentrated. As of December 2023, Bitcoin (BTC), Ether (ETH), and Tether (USDT) together account for a substantial 74% of the total market capitalization and 55% of the annual trading volume.