As the US takes a lead in embracing crypto to a greater degree under the second Donald Trump administration, it’s easy to forget that many banking authorities remain sceptical about digital assets and the wider market.
Some of the most sceptical regulators and central banks can be found in Europe. Though some, such as the Czech National Bank, have shown a willingness, even an eagerness, to see more widespread crypto adoption, others are not as convinced of the benefits.
In a speech on Saturday (15 February), the Governor of the Bank of Italy, Fabio Panetta, asserted that the rise in ownership and use of crypto-assets needs authorities’ attention, partly due to the ‘extensive use for illicit purposes’.
This is something that has dogged cryptocurrency since its foundation back in the 2000s and continues to attract the attention of authorities and organisations as far reaching as the UN – the global organisation published a report last year, for example, highlighting the criminal activity in Southeast Asian crypto and gambling circles.
A degree of separation
The head of Italy’s central bank does not believe that some of crypto’s biggest scandals have had a major impact on the realm of traditional finance due to the degree of separation between the two sectors in recent years.
Take the collapse of FTX, one of the world’s largest crypto exchanges, in November 2023, for example. The collapse sent shockwaves throughout crypto which saw prices and valuations tumble, but its seismic effect was not felt by traditional banks.
“So far, irregularities and failures involving crypto-asset operators and markets have had a limited impact on the financial system, as the two sectors are separate,” he said. “However, the situation is evolving in different ways across countries, raising complex questions.”
Though it is hard to deny that there is a strong separation between traditional finance and crypto, it is also hard to deny that the two sectors are becoming increasingly interlinked. The soaring value of Bitcoin last year, exceeding $100,000 for the first time, caught the attention of many investors and banks.
Stablecoins are becoming an increasingly attractive proposition due to the lower levels of volatility these digital assets enjoy, as seen by the activities of Standard Chartered and others.
Also bridging the gap are trading platforms like eToro, Robinhood and Plus500, which allow users to invest in traditional financial assets like stocks and shares but also crypto. For Panetta though, a key area of concern is the prospect of big tech firms increasingly deploying crypto-assets.
“If these private means of payment, which can easily be integrated into commercial platforms with billions of users, were to gain widespread adoption, the consequences could be significant.
“Commercial banks would risk losing an important part of their operations. In the public debate, it is sometimes argued that the introduction of a digital euro would entail this risk, overlooking the fact that the real threat comes from crypto-assets, for which – unlike the digital euro – there are no holding limits for savers.”
The increasing connectedness between traditional finance and crypto appears to be causing some concern at some banking authorities, if Panetta’s comments at the ASSIOM FOREX Congress in Turin over the weekend are anything to go by.
Regulatory routes
Much of the hype, for want of a better word, around crypto over the past few months has come about because of the re-election of Donald Trump as US President. Trump is vocally pro-crypto, and since his inauguration he has begun to put his words into actions and policy – though not to the extent that some crypto stakeholders may have hoped, such as working towards a crypto stockpile as opposed to the preferred crypto reserve.
Nonetheless, Trump’s enthusiasm for crypto suggests a new regulatory era for the sector in the US. The Federal Reserve has already suggested a change in tone and the pro-crypto president has installed new leadership at the Commodity Futures Trading Commission (CFTC), the regulator which will have the most important remit over crypto.
In Europe, meanwhile, the Markets in Crypto-Asset (MiCA) regulations have created what many believe will be a positive environment for stablecoins, but Banca d’Italia’s Governor also notes that the regulations have a stronger focus on investor protection and are more closely guarded. In contrast, the US is widely expected to go down a much more free market route.
“These regulatory divergences between the United States and Europe will need to be carefully assessed, once the US authorities’ position becomes clearer, in order to understand their international implications,” he said.
“Regulatory arbitrage in this field may be particularly insidious and difficult to counter: some operators might exploit regulatory differences to adopt less-than-transparent or highly risky practices, with possible consequences for savers and the integrity of the financial system.”
