Spain bank financial innovation division Europe cryptocurrencies - What are the risks of cryptocurrencies and how Europe threatens the advance of the digital euro, according to the head of the financial innovation division of the Bank of Spain.

Cryptocurrencies are being the subject of abundant controversy.

For some, they are the paradigm of innovation, ethics, decentralization and financial deregulation. For others, they are nothing more than a casino game or an instrument of speculation.

Spain bank financial innovation division Europe cryptocurrencies

Most investors have doubts about what role a "piece of digital code" registered with decentralized “blockchain” technology and listed and operated as if it were a financial asset should play: should cryptocurrencies be part of an investment portfolio competing with traditional assets? Will central banks enter the scene with regulation and adoption of official digital tokens?

The reality is that regulation looming over cryptocurrencies and Central Bank Digital Currency projects (CBDCs) have also entered the debate. And it seems that the direction is already taken and moving towards the relative tokenization of the economy, which could slightly affect the current prospects of cryptocurrencies such as bitcoin or ethereum.

In a digital meeting organized by GVC Gaesco, José Manuel Marqués, head of the financial innovation division of the Bank of Spain, has detailed what are the main risks that cryptoassets have today and how central banks are moving towards the implementation of digital currencies.

Spain bank financial innovation division Europe cryptocurrencies

Taking bitcoin and other assets of this type as a reference, Marqués believes that there are relative doubts in 2 areas. "First, in terms of its use as a means of payment compared to others that already exist,” he said.

One example is the number of transactions supported by cryptocurrencies per second. Bitcoin's is 4.5, ethereum's is 30, but Visa's is 24,000. Figures that show the distance that exists in this area.

” For example, in China, the goal they have to adopt a cryptocurrency as regulated is 200,000 transactions per second; data that is far from being supported by cryptocurrencies today, " Marqués explained. In addition, the average daily transactions of PayPal is 42,076 million for the 307,000 of bitcoin.

But it is not the only risk of cryptocurrencies and the obstacle they have in the long term. The second, as highlighted by the Banco de España expert has to do with its as an investment instrument. "The volatility it has ingrained is a major impediment at present," he said.

Spain bank financial innovation division Europe cryptocurrencies

There are clear numbers, regarding these swings. The average annualized daily volatility of the S & P 500, the benchmark index of the US stock exchange is 15.3% in 2021, while that of bitcoin is 68.7%. A roller coaster that still frightens many institutional investors.

For Marqués these instruments have limitations to their use as an investment. “A first problem is exchanges [the sites where crypto assets are exchanged for Fiat money], where there is a lot of concentration,” he has analyzed.

According to the expert, the market share of these platforms, which are not very regulated, is very high and therefore there is a risk of market manipulation. And to this we must add that the concentration of the wallets, where the custody of these cryptocurrencies is carried out, is also very concentrated. “Therefore, there are problems of transparency of high concentration and low liquidity that, for regulatory bodies, are important, " he said.

From this arises the doubt about whether central banks have to make efforts to issue digital currency and about the greater regulation by the adoption of these cryptoassets as means of payments.

Spain bank financial innovation division Europe cryptocurrencies

The reality is that 80% of central banks are working on CBDCs. "In the Eurosystem, progress is being made towards a position report, public consultation, dialogue with industry, experimentation and research," he said before adding that a digital currency of the central bank would be a liability of the monetary institution, since it would not be a deposit of the bank

” The idea is that it doesn't eliminate cash or deposits and that it is an alternative to using digital assets, " he said. "Overall, it's designed for retail payment use," he added.

The scenarios that would justify its issuance are support for digitalization and payment sovereignty.

“If cash payments decrease significantly, they would also make sense; and in response to foreign CBC or unsupervised private solutions ( ... ) In addition, a central bank-backed digital currency is a monetary policy tool,” he analyzed.

According to Marqués, in several jurisdictions they are trying to define a regulatory arc suitable to the digital world and the European agenda would be among the most ambitious. "First, MiCA regulates the issuance and provision of services around cryptoassets in a similar way to other financial services; Dora, improves ICT risk management and unifies basic conditions of the provision of third-party services; DME that disciplines the behavior of big tech to prevent abuses; and DSA, which regulates online intermediation in relation to illicit content and fundamental restrictions, " he specified.