Regulators are still cautious about the crypto-asset sector. There are many scenarios for how the sector could evolve in the coming months, but the most plausible for the Bank of Spain is to concentrate more and more on instruments that show greater stability and a lower risk profile. The best known would be “stablecoins”, which are digital currencies backed by traditional currencies like the dollar. The regulator says in its latest Financial Stability Report that if this evolution is consolidated, it “seems hard not to highlight the interconnections with the traditional financial system.” And that wouldn’t be good news. While certain operational risks will be reduced in this scenario, “the potentially larger size of the crypto-asset sector and greater interrelationship with the traditional financial system” may increase systemic risk in any case“.
In recent months, investors preferred to bet on these smaller cryptocurrencies but also more stable on bitcoin. The big favorite is ethereum, which has risen 70% since the beginning of the year compared to the cumulative increase in bitcoin of more than 80%, although there is also interest in cardano, solana or filecoin. From the regulator, they observed a “rapid expansion in the valuations of some of these assets” despite the stabilization of bitcoin, adding to the fears of the Bank of Spain, which still retains its memory of the recent crisis. fresh.banking took place a month ago. For the organization led by Pablo Hernández de Cos, the turbulence of some midsize banks in the United States clearly reflects how deposits these ‘hard currencies’ hold in institutions as part of their reserve assets can be a “contamination channel”. security vulnerabilities”.
This is the final justification for national and supranational authorities to encourage regulation of crypto assets, which has yet to come. “The successive periods of crisis in the crypto-asset ecosystem recorded in 2022 only justified the regulatory impulse,” the Bank of Spain report states. The first alarms went off when Terra/Luna crashed in the second quarter of 2022. But, Regulators draw attention to bankruptcy FTX as “particularly descriptive” for centralized, interconnected and opaque contract structures. His collapse occurred when it was learned that client funds were diverted to another company led by founder Sam Bankman-Fried, causing underlying solvency problems.
The fall of FTX was the start of a long list of bankruptcies affiliated with this firm such as BlockFi, Genesis, and Gemini, but it did not have systemic consequences for the banking industry as a whole, as its exposure to the crypto-assets sector decreased. as a whole. While its impact on the traditional financial sector has been limited, it has hit certain assets hard, such as Silicon Valley Bank as well as discredited bank Signature Bank. Therefore, one of the warnings of the regulators Target individuals for a combination of deposits and cryptocurrencies“especially if it is to become a savings instrument or a dominant means of payment as a substitute for bank deposits”.
Strengthen editing
Despite the slowness of bureaucracy, recent successive crises in the industry have strengthened regulators’ defenses against decentralized financial services. postponed some regulations beyond 2024. “As the crypto asset sector continues to present high risks, authorities continue to work to protect individual investors and limit externalities in the financial system as a whole,” the Bank of Spain report said. The only ongoing initiative is the European Systemic Risk Board (FSB), which internationally coordinates the work of different financial authorities and international organizations that set standards for financial activity.
If it does not extend further over time, MICA regulation must be first enacted Harmonizing the legislation of all Member States of the European Union around issuers of crypto assets, exchanges and cryptocurrencies. This law was initially approved in July 2022, but its enactment will finally take place in 2024. From then on it will have to wait another 18 months to see the first applications as well as the first effects. sector. There are three types of crypto assets that will fall under the jurisdiction of this law: ‘electronic money tokens’, which are more stable because they refer to the value of an official currency; ‘entity-referenced tokens’ intended to maintain a fixed value referenced to another value or right; and the rest. In any case, a white paper should be prepared and reported to the competent authority.
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At the same time, The Basel Committee will apply the standard from 1 January 2025 about the prudent treatment of banks towards crypto assets. The measures will apply to all crypto assets, with the exception of central bank digital currencies, “whose cures will be addressed as they are released.” Testing of the Digital Euro (EURM) has already begun in Europe, and testing has begun in Spain between the Bank of Spain and the Spanish ‘fintech’ Monei. The UK is also examining the launch of the digital pound ‘britcoin’ to see future uses.
The use of the digital euro in Spain makes sense because Fifth largest economy by crypto-asset transactions volume in Europe in 2021. According to Regulatory Spaniard’s 2021 Financial Stability Report, around 60,000 million euros moved in cryptocurrencies in the country, which represents 2.7% of total financial assets in the region and was developed by the UK, France, Germany and the Netherlands alone. However, in 2022, the FTX effect caused a 6% contraction in the cryptocurrency market in Spain, and its value fell to 368 million euros.