Bank of Spain warns against using crypto

TL;DR Breakdown

• The Bank of Spain has recently published a report which discourages the use of cryptocurrencies.
• The Bank believes that crypto assets are not backed by anything, and their prices are volatile.

The Bank of Spain has published a new study that discusses the legality and popularity of cryptocurrency usage and its potential impact on national financial stability. The bank blames these assets, which, according to their description, do not have any kind of backing for systemic risk because they are adopted by conventional institutions and lack oversight.

The Bank of Spain’s deputy governor, Margarita Delgado, addressed cryptocurrencies and how they are boosting risks in the current economy. During a PWC event called “A climate of change,” Delgado explained that the continual and prolonged use of cryptocurrencies may pose distinct hazards for 12% of the population who now own them.

This “systemic risk” is explained by the growing links between crypto and the traditional economy. On this, the Bank of Spain identifies two possible vectors.

The Bank of Spain claims that the digital currency market is susceptible to “systemic risk,” which it defines as a financial crisis caused by macroeconomic, government, and regulatory policies. The growing links between crypto and the traditional economy are responsible for this.

There are two possible vectors here. The first is centered on the first concern is the heightened volatility of these assets and their relationship to traditional markets. The paper explains: When the price of cryptocurrency assets is extremely volatile, there may be greater interdependence between individual cryptocurrencies and financial assets. This can make the market for cryptocurrencies more similar to the market for conventional financial instruments.

The second hazard comes from the higher market capitalization of traditional stablecoins like USDT and USDC, which forces their issuers to maintain a large number of support assets. In the event of an accelerated rise triggered by market conditions, this might impact the valuations of these “safe” assets.

Bank of Spain’s Deputy Governor examines cryptocurrency risks

Margarita Delgado, the deputy governor of the Bank of Spain, has offered her thoughts on cryptocurrencies and how they might affect the country’s economy. The remarks were made in a speech at PWC’s “a climate of change” conference, which focused on the changing nature of financial services.

The vice governor stated that the long-term usage of cryptocurrencies poses a slew of dangers to the system, including a lack of general cryptocurrency knowledge among users. The following are a few of the hazards: 

The obscurity surrounding decentralized finance, which might lead to over-leveraging and payment difficulties. After describing the potential impacts that crypto trading may have on different sectors, Delgado said:

Due to its high volatility, it may have a contagious impact on other markets due to the fear and overreaction that may be transferred to different trading environments.

Crypto users prefer decentralized providers

Europeans prefer decentralized applications and non-backed crypto-assets like Bitcoin (BTC) and Ethereum (ETH). Furthermore, the Central Bank of Spain declared that cryptocurrency transaction volume in the European region had increased rapidly over the past year, surpassing €845 billion, nearly equal to that of the United States.

According to the study, Europeans are more interested in non-backed cryptocurrencies than in the past, with BTC and ETH transactions representing about 59% of all transactions completed during the previous year. The use of supported digital currencies accounts for 25%, whereas interest in altcoins other than ETH is almost 15%.

In contrast, according to the ECB, 64% of Spaniards would select decentralized services to conduct their transactions. In Europe, the usage of these services is around 53%.