Concentration of crypto trading on few exchanges raises concerns, says EU securities watchdog

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10th April 2024 – (New York) The European Union’s securities watchdog, the European Securities and Markets Authority (ESMA), expressed concerns on Wednesday about the high concentration of cryptocurrency trading on a small number of exchanges, with Binance alone accounting for approximately half of the market. This concentration raises worries about the potential impact of a failure within the sector. As part of its efforts to regulate trading in cryptoassets such as bitcoin, Ether, and Tether, the EU is introducing the world’s first comprehensive set of rules that require exchanges to obtain authorisation.

ESMA’s detailed analysis of trading activities and participants revealed that the euro currency has a limited role in the crypto market thus far. The watchdog found that trading volumes are highly concentrated, with around 90% of trades occurring on ten exchanges, and Binance being the largest, responsible for more than 50% of the trading volume.

While the efficiency gains from such concentration are acknowledged due to economies of scale, ESMA highlighted concerns regarding the potential implications of a major asset or exchange failure for the broader crypto ecosystem. Binance responded by stating that it considers the healthy and sustainable growth of the crypto industry as a shared responsibility among market participants, including the company.

ESMA also noted the challenge of identifying the origin of order flow and the geographic location of crypto exchanges, with a significant portion of global trading volumes taking place on exchanges outside the EU that operate in tax havens. Furthermore, ESMA found that cryptocurrencies do not consistently exhibit the characteristics of a safe haven asset during times of market stress and lack a stable relationship with gold.