Cryptocurrencies at a crossroads: regulation or risk for the financial system?

Cryptocurrencies at a crossroads: regulation or risk for the financial system?

On April 25, 2025, a study by Christopher Olk and Louis Miebs from the Free University of Berlin was published that addresses the change in the global cryptocurrency system towards a credit-based shadow banking system. The study, which appeared in the journal “Review of International Political Economy”, advocates a reassessment and regulation of cryptocurrencies in a similar way to traditional banks. A central concern of the researchers is the question of who is ultimately allowed to create money and under what rules this should happen.

The analysis refers to the crypto crisis of 2022, when stablecoins such as TerraUSD and trading platform FTX collapsed. The authors see these events as symptoms of a systemic development and not just isolated cases of fraud. Cryptocurrencies are increasingly behaving like money, mediated through centralized platforms that provide credit relationships and liquidity.

State regulation as a necessary step

Stablecoins are referred to in the study as “shadow money” because they offer price stability and convertibility into state currencies, but are not backed by the state. The centralized trading platform FTX operated similarly to a bank, but without the necessary license or supervision. The high risks in the balance sheets of these platforms led to a serious loss of trust and the loss of billions in value.

History shows parallels to earlier developments in capitalism, in which private actors created new credit products in times of low returns. The authors call on politicians to clearly address the question of how cryptocurrencies can be integrated into the state-supported financial system. The crypto system is at a turning point: there is now the possibility of greater regulation or continued existence as a systemic risk zone.

Since the first Bitcoin was created in 2009, the crypto system has developed rapidly. Thousands of cryptocurrencies have emerged, but the system remains small and isolated compared to traditional finance. In its monthly reports, the Bundesbank warns of the risks revealed by the collapse of the FTX trading platform in autumn 2022. In addition, European and international regulatory authorities are monitoring developments in the crypto sector.

Regulatory initiatives and challenges

The regulation of crypto assets is carried out according to the principle of “regulate and contain” in order to regulate the system and minimize risks of contagion with the traditional financial system. Central to this discussion is the European Regulation on Markets for Crypto Assets (MiCAR), which was passed on June 9, 2023 and came into force on June 29, 2023. MiCAR aims to create a harmonized legal framework for unregulated crypto assets.

The individual players in the crypto system are required to comply with rules on corporate governance and capital adequacy. BaFin and the Bundesbank supervise issuers of stablecoins and e-money tokens in Germany. In addition, technical regulatory standards and guidelines are being developed by European supervisory authorities.

The Basel Committee on Banking Supervision (BCBS) is developing international standards for banks in the crypto system, which are to be implemented by January 1, 2025. Discussions are currently underway in the EU to revise the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). In addition, new pilot regulations for DLT-based market infrastructures have been in effect since March 23, 2023.

In summary, the study authors and the Bundesbank emphasize the urgency and importance of the consistent implementation of regulation in the crypto sector. In Germany, however, national legal changes are still pending in order to fully integrate the MiCAR requirements.

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