Monday, May 29

The popularity of bitcoin changes the focus for its control: from the veto to the firewall

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The efforts of the institutions to have control of bitcoin they change their accent. The unstoppable diffusion of cryptocurrencies has turned the focus on its regulation from the formulation of vetoes towards the introduction of firewalls between them and the world of traditional finance.

Given the evidence that these digital assets enjoy a growing popularity and proof of its huge price lurches, more voices and higher reputation advocate for this paradigm shift. The ultimate goal is that the expansion of cryptocurrencies that have failed to stop bans in force in several countries of the world does not end up becoming a risk for the financial system.

The most significant change of direction in this sense has just been given by the International Monetary Fund (IMF). In its latest study on the evolution of cryptocurrencies, the organization opts for this formula as the best way to save traditional finances from any shock that can be produced in bitcoin, ethereum or any of its little sisters.

Risk of contagion

Those most enthusiastic about these digital assets present this change in focus as “an acknowledgment of their ability to challenge the traditional financial system”, as defended by an operator of this market. However, the truth is that the IMF’s concerns have exactly the opposite motivation, as it states that “crypto assets are no longer outside the financial system.”

The institution’s warning is clear. If what you want is to avoid risk of contagion between the financial markets”, it is urgent that a “comprehensive and coordinated” regulatory framework be established at a global level that addresses this issue. And it is that the fact that cryptocurrencies are part of decentralized structures and without physical location makes it difficult for national vetoes to be effective for this pressing purpose.

In this sense, the truth is that every time a country has proceeded to totally ban cryptocurrencies or any of its uses, the measure has translated into more volatility for its price. The most recent cases have been Turkey Y Russia. In both cases, the price lurches caused by their vetoes have been pointed out precisely as arguments to justify their categorical decision.

The person in charge of one of the most well-known Spanish digital asset platforms explains that, “if this paradigm shift were put into set phrases, it would mean going from making an effort to put doors to the field to build firebreaks so that, in the event of a fire, the damage is as limited as possible”. Something that he considers much more executable and positive.

No diversifying effect

Precisely, from the IMF it is warned that “cryptoactives such as bitcoin have gone from being a class of dark assets with few users to an integral part of the digital asset revolution”. A spread that, as he explains, has increased in tandem with “a growing interconnection between virtual assets and financial markets.”

It is this parallelism between popularity and correlation with traditional investment assets that has pointed to the need for these firewalls. And it is that the data collected by the institution in its study underline that “its correlation with stocks has become higher than that of stocks and other assets such as gold, investment grade bonds and major currencies.

Beyond questions of use, this link between actions and cryptocurrencies is what already “generates concerns on financial stability. Even more so because many of those who entered these digital assets in the early stages of the pandemic did so looking to diversify the risk of their portfolio and now they find that their most recent evolution proves the opposite.

brussels earrings

While the regulation of the sector in Europe through the directive MiCA (of English, Markets in CryptoAssets) is delayed, this change of focus seems to bless the line that was being worked on, albeit very slowly, in Brussels. In this sense, it is foreseen that the norm leaves outside its scope issues relating to the use of tokens as a means of payment and other factors such as mining.

Instead, the emphasis will be on pointing out clear rules of the game for the operation with crypto assets, their exchange and issuance through initial offers (ICO, for its English acronym).

The question is whether, while more and more citizens entrust part of their savings to these assets, the introduction of new licenses and supervision requirements will be enough firewalls. up on time between this world and that of the old finances.