The governor of Banco de Espana, Pablo Hernández de Cos has expressed concern over the increasing exposure of traditional banks to crypto assets. Hernández de Cos said that the risks associated with traditional finance are significant but that the exposure to crypto assets will make the threat even higher.
The governor made the statement during the launch of the II Finance Observatory, an assessment session for the finance and insurance industry in the country.
According to him, some cryptocurrencies such as stablecoins are also emerging as competitors of traditional monetary instruments. This, according to him, is due to the fact that stablecoins are pegged to traditional national fiat currencies. Some central banks are also working on their own stablecoins as the interest in cryptocurrencies continues to increase.
Volatility of Digital Assets Could Cause Panic
The governor acknowledged that the exposure of traditional banking institutions to digital assets is still limited but raised concerns that this trend will increase over time as more third-party businesses offer more services that help banks and financial institutions to easily integrate with digital currencies.
De Cos stated that this will also become common as the adoption of cryptocurrencies increases. He maintained that the money market would likely be stressed when investors panic due to the volatility of cryptocurrencies. This would be the result of increased exposure to this class of assets.
Regulatory Challenges of Cryptoization
He said that another shortcoming of cryptoization is that management and control of monetary policy will be more difficult.
The governor doubted the capacity of regulators to enforce AML requirements with mass adoption of cryptocurrencies. Spain has been working on a regulatory framework to ensure that cryptocurrencies are not used for illegal activities in the country. The country’s banking system has a total net worth of 215 billion euro according to 2021 data from the European Central Bank (ECB).