The Bank Spain warns increase crypto assets and their "interrelation" with traditional finance may cause them to become a "systemic" risk.
Crypto assets are becoming increasingly popular, and this could make them a big problem for the financial system.
Regulatory bodies warn, once again, of the dangers that may occur in the heat of the cryptocurrency boom.
This time it is the Bank of Spain in a special chapter on crypto assets of the Financial Stability Report.
The agency warns that if they continue to grow, and their interrelation with the traditional financial system grows, they could end up posing a "systemic" risk.
Bank Spain warns increase crypto assets
"An increase in the scale of crypto-asset markets and their interrelation with traditional financial assets and institutions could endow these risks with a systemic character," the body warns in this text.
The increasing volume of liquidity moving in this unregulated world is what is behind the warning of the Bank of Spain.
The entire crypto-asset market reached its largest capitalization in 2021 (2.8 trillion US dollars, approximately 1% of global financial assets), which represents an order of magnitude higher growth compared to as recently as the end of 2018, when it only reached a global proportion of 0.02%, according to the same text.
"The value of the global crypto-asset market is still limited, but its growth since the end of 2020 has been exponential, and unsecured crypto-assets concentrate the lion's share of trading, which signals an increasing risk to financial stability," the text notes.
Bank Spain warns increase crypto assets points
The Bank of Spain points out that, however, the risks assumed by individual holders of crypto assets, "although they may be very high, they do not necessarily represent a systemic risk."
"To do this, it would be necessary for these markets to have a volume or number of critical interconnections, which could, in case of difficulties, destabilize the financial system," they add.
A special mention is made in the text to the so-called stable coins, those crypto assets that are backed by a secure asset.
This implies an increase in demand for these safe assets and may put additional downward "pressure" on equilibrium real interest rates.
"In addition, an increase in pressure to convert stable coin holdings into legal tender could lead to the hasty liquidation of positions in these products and generate liquidity tensions. To the extent that the stable coin segment reached a larger size, these liquidity risks would worsen," he points out.
"Likewise, the role that stable coins currently play in facilitating operations with crypto assets without backing, creates a very relevant interconnection that increases the risk profile of these instruments," he adds.
Bank Spain warns increase crypto assets finance
Now, more traditional finance is being quite cautious about this scenario, but some investment vehicles related to these assets are already beginning to emerge and some banks are starting to allow some of their clients to operate with cryptocurrencies.
The text of Banco de España is a warning to navigators. A warning that adds to the doubts of the bank in this scenario. Because, on the one hand, they do not want to enter a business that is not regulated; while on the other, they see how the boom in these investments becomes a threat to them.
In addition, of this possible systemic risk. The Bank of Spain recalls that "the market and liquidity risks associated with crypto assets can be high, in particular, for those that do not have the support of traditional financial assets."
Another risk that points out is that "these instruments can be used for illicit activities, in particular money laundering, and its dependency of innovative technologies also poses operational risks, which include the dimensions, legal and reputational, as well as questions about the transparency of its operation and the energy consumption associated elevated to the same, with a possible impact on the climate risks".
Banco de España recalls the little regulation that exists around this practice of buying and selling cryptos. In the case of Spain, activities on crypto assets are not currently regulated, except for the requirements of their advertising contained in a circular approved by the CNMV.
In the case of Banco de España, the body recalls that it lacks regulatory powers or on the authorization or supervision of service providers related to them.
In this sense, in the text they point out that there are various regulatory initiatives in some countries, but they consider that what would be "urgent" is "the development of initiatives at the international level, and, in particular, European".
In this way, they emphasize that this would allow "establishing homogeneous rules, avoiding regulatory arbitration between jurisdictions, as well as correcting deficiencies in the information available on this market, which are relevant and should be corrected quickly."
A Community regulation, the text continues, would provide "legal certainty in the operation with crypto assets, and an adequate prudential regulation and supervision will be possible that would allow the technological possibilities associated with these instruments to be beneficially exploited, while avoiding the excessive accumulation of risks".
# Bank Spain warns increase crypto assets #
