The rise of stable cryptocurrencies introduces a new unexpected risk for the whole of the traditional financial system.

The rise of stable cryptocurrencies introduces a new unexpected risk for the whole of the traditional financial system.

The rise of stablecoins introduces a new unexpected risk to the entire traditional financial system.

Hernández de Cos sees risks in the popularization of cryptoactives.

The proliferation of stable cryptocurrencies (stablecoins), which were born with the aim of becoming stores of value, is beginning to draw an incipient threat to the financial sector. The ‘cryptization’ of household savings, traditionally housed in bank deposits, has led the Governor of the Bank of Spain, Pablo Hernández de Cos, to warn of the risks that an eventual massive withdrawal of positions in these crypto assets.

The recent price crash of some of the most popular cryptocurrencies, such as bitcoin and ethereum, has led many investors to seek refuge in these stablecoins. And it is that their main virtue is that they have a fixed exchange rate against a fiduciary currency -normally the dollar-, so that they represent a fairly accessible formula to maintain positions in the ecosystem. cryptobut putting the brakes on the accumulated losses.

Yet it’s in the way you are stablecoins they fix their exchange rate where the bulky problem that could entail for the traditional financial system lies a possible widespread collapse of the crypto asset market. In this sense, the next step to transfer the invested capital to these stable coins would be their sale in order to obtain the money. fiat in which its investors continue to manage on a day-to-day basis despite the unstoppable popularity of cryptocurrencies.

redeem or liquidate

In the best of cases, the providers of these stablecoins they would have to redeem your reserves in fiat currency of reference to meet these sales requests. At worst, proceed to liquidation of your positions in other assets denominated in the current legal currency to meet these reimbursements.

This last scenario is the one that could lead to a domino effect that, in the event of a stampede similar to the one that occurred in the stock markets with the appearance of the coronavirus in March 2020, would translate into large setbacks in the price of numerous assets and markets of the classical financial system. And this is not a science-fiction doomsday scenario.

Symbols of various cryptocurrencies at a financial fair.

Symbols of various cryptocurrencies at a financial fair.

The characteristic volatility of the cryptoactive market, which leaves a 135% gap between trading highs and lows for bitcoin in the past year, it is often a breeding ground for investor overreaction. More so, if possible, when many positions have a clear speculative component and have been formulated by investors with little experience and little capital.

Given this horizon, there are more and more alerts coming from regulators and supervisors around the world to claim coordinated actions that establish firewalls between the cryptoactive market and traditional finance. One of the most reputable voices to join this demand has been that of the experts from the International Monetary Fund (IMF) after having verified that the positive correlation between cryptocurrencies and capital markets has multiplied by 35 in the last time.

Gold, deposits and balls

The digital currencies that its enthusiasts a short time ago presented as the ‘digital gold’ they have ended up moving to the sound of stock markets and bonds. And that is what has set off the alarms and in many cases accelerated the regulatory processes that some countries had stalled for a long time. Meanwhile, the traditional ingots of the precious metal have managed to claim themselves as a true refuge in the midst of the latest episodes of tension.

As if that were not enough, the demand for the stability of the stablecoins combined with that of the high returns achieved in some periods For it depends on which cryptocurrencies threaten to exponentially multiply the risk of ‘cryptization’ of savings. A determining issue for the banking system now that the horizon of increases in official interest rates seems to be leading the sector towards a new ‘liability war’.

In this sense, different sources in the sector warn that the new generations could be increasingly inclined to try to ‘hit the ball’ with cryptocurrencies thanks to the apparent safety net offered by the growing catalog of stablecoins available to trading platforms for these digital assets. Probably much more than to leave your savings in a few bank deposits that in recent years have not contributed more than a tiny return due to the long persistence of interest rates at historic lows.

Despite the fact that these official rates seem to have already counted their months, judging by the discourse of the central banks and the multiple warnings that the supervisors promote about the possibility of lose all invested capital in cryptos due to the absence of any type of backing guarantee, the risk of ‘cryptization’ of the economy continues to grow.

El Salvador and Ukraine

However, the great risk in this regard occurs when large population groups migrate entirely from their national currency towards cryptocurrencies. Here, the threat is multiplied because, as the governor of the Bank of Spain has recalled, “these processes compromise monetary autonomy and erode the ability to exercise effective control over international capital movements.”

The most worrying cases for the institutions are those deliberate and promoted by the public administrations themselvesas in the case of the adoption of bitcoin by The Savior as legal tender. A movement that, however, did not cause any significant upward movement in its price against the US dollar, the currency to which the Central American country previously linked its economy.

Nayib Bukele, president of El Salvador and promoter of the adoption of bitcoin as legal currency.

Nayib Bukele, president of El Salvador and promoter of the adoption of bitcoin as legal currency.

More recently, Ukraine has joined this trend -although without giving up their hryvnia- as an emergency measure so that its population can save their savings from a possible devaluation or even the disappearance of their national currency if Russia ends up embarking on the invasion of the country.

Before this measure was approved by the Verkhovna Rada, the official name of the Ukrainian Parliament, daily transactions in cryptocurrencies already moved larger volumes in the country than those executed on the hryvnia itself. The height of pre-war tensions on its eastern border and the legal blessing of these practices could further aggravate this scenario.

erect firewalls

The signs of the arrival of a crisis for the traditional economy – such as the possibility of a major war – could help accelerate ‘cryptoization’ elsewhere, although on a smaller scale. Nor should we forget that the most enthusiastic cryptocurrencies continue to press for bitcoin to be recognized as a “foreign currency” in several countries and thus even force its entry into the vaults of central banks.

Financial supervisors remain on guard. From the study of increasingly detailed warnings to potential investors, even in the advertising of crypto assets, to discouraging the approach of traditional financial agents. Thus, in order to curb the direct exposure of banks beyond the collateral effects already mentioned, the Basel Committee has even come to propose higher capital requirements for entities that operate or offer services in this universe.


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