Briefly,
- Italy’s Central Bank warns of the potential for market instabilities if crypto is linked to conventional finance.
- Trump’s crypto-asset promotion could be a danger to market participants and brokers.
- Even so, the largest Italian commercial bank has made Bitcoin investments in January.
Italy’s central banks has reiterated its concerns about crypto assets’ growing influence on traditional finance. This comes as Italy’s biggest commercial bank intensifies its efforts to embrace digital assets.
Its latest Financial Stability Report, published Monday, the Bank of Italy, or Banca d'Italia, flagged the rising global integration of crypto as a potential threat to financial stability.
Since years, central bankers around the globe have warned about systemic risks that crypto poses due to its growing connection with traditional finance. They cite volatility, regulatory gap, and possible contagion between markets.
Recent political developments in Washington have further increased the alarm among major financial institutions.
In its report, the bank pointed to sharp increases in digital asset prices following the U.S. election of Donald Trump and his administration's crypto-friendly initiatives, warning that deeper entanglement between traditional finance and the volatile asset class could create systemic vulnerabilities.
The report said: “These instruments could become increasingly intertwined with traditional financial systems and increase the vulnerability of markets and intermediates.”
At the end March 2018, the crypto market had a value of $2.75 billion. Bitcoin alone accounted for over 60%, while 30% came from unbacked cryptoassets.
Just 9% of the market consisted of stablecoins—digital assets tied to traditional currencies, most of which are pegged to the U.S. dollar.
Trump Effect
The U.S. pro-crypto pivot Under President Trump, digital assets have seen a renewed interest.
In the last few months, the U.S. regulators have softened their stance towards crypto, and they’ve dropped several investigations against crypto companies, while at the White House, the government hosted crypto-related events.
Italian banks are concerned by the increasing ties that exist between governments, traditional financial institutions, and cryptocurrency, especially in the U.S. It also focused on ETFs and corporate Treasury departments that increasingly hold Bitcoin as a way to support share prices.
Also, it warned about conflicts of interest and governance issues, as well as the concentration of power of cryptocurrency in just a handful of U.S. firms.
The report stated that “significant amounts of Bitcoin are owned by firms operating in the digital asset industry (e.g. exchange platforms) which do not adhere to governance standards and could therefore be facing significant conflicts of interests.”
The report claimed that 75% of the firms were based in America, while others are located in China, Canada and the U.K. and have a minimal presence in the Eurozone.
Stablecoin sovereignty
It also discussed the disproportional influence of stablecoins backed by dollars, such as USDT from Tether and USDC from Circle. The Bank noted that widespread redemptions could lead to a sale of U.S. Treasury bonds, and cause global markets to be shaken.
Bank of England warned euro stablecoins introduced by U.S. companies could threaten EU payment systems as well as monetary sovereignty.
While the Italian central bank is urging caution, the banks themselves are not on board. Intesa Sanpaolo, Italy's largest banking group, is quietly Developing The cryptoplaybook is its own playbook.
In January, the bank bought 11 bitcoins worth around €1 million ($1 million), marking the first direct purchase of bitcoins by an Italian lender. It refused to give any rationale for its decision.
In November, it added crypto spot trading to its proprietary trading desk.
Even politicians are taking part. In January, MP Marcello Coppo Called on Italian banks to invest Bitcoin
Even if the Bank of Italy has reservations about its potential financial impact, it is not abandoning blockchain technology.
It was a very busy year. A permissioned protocol that is designed to work with Bitcoin. It adds privacy features for the validators, and pushes towards a digital ledger of a central banking institution.
Editor by Sebastian Sinclair
