The European securities regulator has described the digital currency as “volatile”, despite the recognition of digital assets as an innovative development.

The European Securities and Markets Authority (ESMA) has released a report showcasing its 2021 Financial Innovation Scoreboard, which puts digital currency and blockchain technology at the top of the list.

The report, titled ‘Trends, Risks and Vulnerabilities’, saw digital currency as a trending innovation in finance, as well as a threat to the sustainability of financial services, due to its environmental impact, particularly with regard to bulk rewards mining.

Among the risks highlighted were the volatility of digital currency assets, the growth of decentralized funding platforms, the imminent launch of central bank digital currencies and stablecoins.

“Most crypto assets (CA) are very volatile in price and operate outside the existing European regulatory framework, which raises investor protection concerns,” the report said.

The report then identifies increasingly risky behaviors in the equity and digital currency markets as being partly responsible for the increase in volatility:

“Increase [risk-taking] behavior has led to volatility in stocks (e.g. GameStop-related market movements) and crypto asset markets, as well as the materialization of event-related risks, as in the case of Archegos or Greensill .

ESMA is an independent agency responsible for overseeing securities regulation within the European Union. In addition to ensuring order in the financial markets, the agency’s mission is also to protect investors against fraud and scams.

Their annual scorecard examines innovations in financial services, ranked in order of perceived need for policy response or further analysis, and how they relate to ESMA’s overall objectives.

With digital currency, digital assets and blockchain technology now topping the list, it looks like the sector could be the subject of further scrutiny from regulators across the EU.

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