Crypto’s growth within traditional institutions will create contagion risk that threatens financial stability, ECB warns

• Cryptocurrency's growth within traditional institutions will pose significant financial stability risk, the ECB said.
• The warning is the first of its kind from the ECB, which released its biannual financial review. 
• The ECB also stressed the need for regulation over crypto assets before growth becomes uncontrollable.

The European Central Bank warned that strengthening ties between traditional institutions and the crypto market will pose significant financial stability risk.

The ECB published its biannual financial review Tuesday, outlining its reservations toward cryptocurrency markets after its first "deep dive" into the sector. The central bank also warned the threat of contagion from crypto is increasing and stressed the need for regulation.

"Over the last few years, the historical volatility of crypto-assets has continued to dwarf the volatility of the diversified European stock and bond markets," the ECB said. Even as volatility grew in 2021, the ECB said, investor appetite pushed cryptos to all-time highs.

And traditional financial like banks, asset managers and other institutional investors are stepping up their exposure to digital assets, the ECB said, giving customers and clients stronger ease of access to trading that could further fuel crypto growth and increase risks.

"Based on the developments observed to date, crypto-asset markets currently show all the signs of an emerging financial stability risk," it added. "As this is a global market and therefore a global issue, global coordination of regulatory measures is necessary."

The ECB also noted that current market conditions and size for cryptos "remain similar in size to, for example, the subprime mortgage crisis that triggered the global financial crisis of 2007-08."

The central bank's note comes as both the US and UK have stepped up calls for stronger oversight over cryptocurrencies, in part due to the recent downfall of stablecoins like TerraUSD and Tether that lost their fiat currency pegs and triggered a broader selloff throughout crypto markets.