Governor of the Bank of Spain Pablo Hernandez de Cos has called for more intense surveillance of the crypto industry.
In doing so, the governor laid out a series of risks he perceives to be present in today’s crypto industry. The first—and seemingly biggest—risk is the “limited understanding that exists about [cryptocurrency] characteristics on the part of investors.” He added that some crypto investors even “take for granted” that their crypto investment activity would enjoy the same consumer protections their traditional investment activity enjoys.
Among other risks cited in the governor’s address, de Cos brought attention to the risk the cryptocurrency industry presents to the financial markets in general.
“It is true that the existence of these large swings in the prices of these assets can alter sentiment, causing an overreaction that ends up transcending other trading environments,” he said.
This risk, de Cos says, is particularly relevant to the stablecoin industry.
“In this case the accumulation of redemption requests resulting from a generalized panic around [stablecoins] could stress the money markets, and by extension also impact the entities of custodians of the assets,” he said.
The governor added that a significant increase in transactions could cause service delays or interruptions, leading to “tensions” in processing payments.
What’s more, de Cos highlighted the risk presented by the crypto industry to the banking sector.
“An increase in the direct and indirect exposure of the banks to the crypto sector would increase their risks, both financial and reputational,” he said, admitting that while this exposure remains limited today, it may grow in the future.
The governor also raised concerns about emerging countries substituting cryptocurrency for their national currency, stating that the process would “compromise monetary autonomy” along with the “ability to exercise effective control over international capital movements.”
The closest the world has seen to this has been El Salvador, which has not substituted the US Dollar for Bitcoin, but has embraced Bitcoin as legal tender alongside the US Dollar. The IMF has repeatedly urged the country to abandon its Bitcoin experiment, while credit agencies Moody’s and Fitch have raised concerns over the policy.
In addition to the above risks—dubbed “financial” risks by the governor—de Cos also raised two “social” risks inherent in crypto.
First, the governor cited how “some consensus mechanisms” risk derailing society’s climate commitments; the energy use of proof-of-work blockchain systems used by cryptocurrencies such as Bitcoin or Ethereum is well documented.
“Mention must also be made of the risks derived from the possible use of crypto assets for illicit activities, including money laundering,” the governor added.
Despite his calls for caution, the Bank of Spain governor remains optimistic that cryptocurrencies could play a valuable role in Spain’s financial system.
“We have a feeling [cryptocurrencies] could end up being important in the wider financial system,” de Cos said, adding that cryptocurrencies could lead to benefits including improvements in the efficacy of payment systems, or as catalysts for the development of new technology.
