Bank of Spain Governor Seeks Crypto Market Monitoring

Key Insights

• Bank of Spain Governor has demanded intense monitoring of the crypto market
• The governor cited a slew of risks associated with the crypto industry
• Despite the fear of multiple risks, the governor believes crypto has a future

The Bank of Spain’s governor, Pablo Hernández de Cos, has imposed intense monitoring and supervision of the crypto market. He has emphasized various risks associated with digital money and the lack of understanding that the investors have towards cryptos.

The call for crypto surveillance comes at a time of rapid crypto adoption, as Spain recently regulated rampant crypto advertisements.

In his speech at the II Observatory of Finance organized by El Español on Monday, the governor cited a slew of risks associated with cryptos such as Bitcoin and Ethereum.

One of the biggest and prominent risks that the governor laid out is the “limited understanding” among investors about the characteristics of cryptos. He added that some investors “take it for granted,” thinking their crypto investment would get the same consumer protections as traditional regulated investments.

According to a local press, the governor also pointed out that large oscillations in crypto assets “can alter investor sentiment,” causing an “overreaction” that affects other markets.

An Array of Risks

Hernández highlighted certain risks involved when introducing cryptocurrencies into the traditional banking system. Though he admitted that while the crypto exposure remains limited today, it might see positive growth in the future. His speech translated to:

“An increase in the direct and indirect exposure of banks to the crypto-assets sector would increase both their equity and reputational risks.”

He also pointed out his concern about El Salvador’s decisions with cryptos. He said that a decision to replace local currency with cryptos such as the Latin American nation would “harm monetary freedom.”

Among other risks cited by Spain’s central bank governor are those relevant to stablecoins like Tether and decentralized services:

“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.”

Apart from the above “financial” risks, he also noted “social” risks inherent in cryptos, such as “climate transition” due to consensus mechanisms and the high energy requirement for mining operations.

Finally, the governor did mention the risks derived from the possible use of crypto assets for illicit activities, including money laundering.

A Ray of Optimism

Despite the fear of multiple risks, governor Hernández believes that decentralized commerce has a future and that cryptos have the potential to play an essential role in the country’s financial system.

“We have a feeling [cryptos] could end up being important in the wider financial system,” he noted.

Spain has been moving in fits and starts regarding crypto regulations and considering a central bank digital currency (CBDC) launch.

The bank fast-paced its research on digital currency’s design and the economic implications of introducing a CBDC in 2020. It rolled out a four-year strategic plan to consider different “design proposals” of a CBDC.

Last year, the Spanish Socialist Party (PSOE), the governing political body in the nation, proposed creating a national digital currency. The proposal was in response to decreased physical cash usage, a report said.