On November 24, 2021, the National Securities Market Commission reacted to a tweet by Andrés Iniesta in which he stated that he was learning to make use of cryptocurrencies through a North American platform for the exchange of these assets.
With its message, the CNMV wanted to make it clear that cryptoassets are not products subject to regulation and that, therefore, investing in them has significant risks. It also invited potential investors to inquire before making or recommending crypto investments.
Already before, on February 9, 2021, the CNMV had issued a statement with the Bank of Spain to warn about the characteristics and risks of investing in cryptocurrencies (bitcoins, dodgecoines, ethereum...). In it, the two highest Spanish authorities on financial and monetary issues put on the table the reasons why it is necessary to regulate the cryptocurrency market.
A high-risk investment
The high volatility in prices, the complexity of blockchain technology and the lack of transparency of issuers and intermediaries make the risks of having cryptoassets in an investment portfolio especially high.
In addition, if any legal process had to be resolved in the cryptocurrency market, the costs could be very high, as many intermediation service providers have their legal residence outside of Spain.
An investor who loses the access key to his crypto asset account will have very difficult to regain the ability to access his own cryptocurrency portfolio and, thus, could lose his investment suddenly. This makes it essential that protection mechanisms be implemented as soon as possible in the event of a possible loss of the funds invested. Especially for small investors and in particular when investing with leverage (debt).
To protect small investors, cryptocurrencies would have to be classified as an investment product. In this way, the European MIFID regulation, which allows the sale of securities only to small investors who understand all the characteristics and risks associated with their potential investment, could be applied.
Cryptocurrencies? Better regulated
The stock market is regulated to contain dangerous price volatility while cryptocurrency prices are formed in the absence of information and without any link to a legislative framework that limits the formation of bubbles.
It would be desirable, therefore, to implement in the cryptocurrency market control mechanisms similar to those already existing in the securities market. At the moment, the European Commission has made public the proposed European regulation Markets in Crypto-Assets (MiCA) to regulate the issuance and offering of cryptoassets in EU countries.
If this proposal were finally adopted, its implementation in Spain would grant supervisory and control powers to traditional institutions such as the BdE and the CNMV. However, some rules of varying regulatory value have already been approved. For example, Law 11/2021, of 9 July, on measures to prevent and combat tax fraud, transposing Directive (EU) 2016/1164 requires cryptocurrency managers to communicate to the competent tax authority the relevant data, including the dates and transactions made on the cryptoassets market by their customers.
In addition, Royal Decree Law 7/2021, of 27 April, transposing European Union directives (...) in various matters, requires the registration in a register of the Banco de España of exchange and custody service providers of cryptocurrency wallets.
The creation of a homogeneous legal framework in the cryptocurrency market in the European Union could reduce the risks of investing in such assets. History invites us to be prudent in this regard, so that we avoid, for example, a new crisis of tulips.
The nature of currency
If cryptocurrencies come to be regulated as assets, the regulator should ask whether they should also be considered bank currency. In the age of digitization of money it is necessary to understand the nature of currency.
As a few economists have detected, from Adam Smith and David Ricardo in the eighteenth and nineteenth centuries to Bernard Schmitt and the experts of several central banks in the twentieth century, currency is a numerical vehicle whose levels rise or fall in relation to national production and consumption.
In other words, currency does not have a tangible, physical character, despite the fact that the means that represent it, such as cash, do. In fact, as the Central Bank of Sweden knows well, it is possible to maintain a monetary system without any need for gold or cash, since any monetary system is governed by double-entry accounting.
Every monetary intermediation by commercial banks would have to go hand in hand with a financial intermediation, since every payment of wages, for example, always justifies the issuance of currency, backed by newly produced goods and services. In addition, final consumption justifies the decrease in the level of bank deposits (although it is true that economists tend to confront each other on this issue in classrooms and other forums).
Cryptocurrencies, exchange currencies?
With the exception of some isolated cases such as Cuba and El Salvador, which are favorable to the use of bitcoin as a legal tender, as long as there is no monetary regulation of cryptocurrencies, they will continue to be used basically as assets outside the monetary world.
Thus, there will be no obligation in daily life to, for example, accept bitcoins as a means of payment. In this regard, the case of China stands out, which has declared illegal all types of use of cryptocurrencies.
Cryptocurrencies, despite the misleading name, are not created to pay wages: their character is purely nominal and speculative unlike the bank currency, which does have a real backing.
In the particular case of bitcoin, it will reach a maximum limit of 21 million units while the bank currency allows unlimited bank deposits. In addition, the support of central banks allows monetary homogenization and prevents dangerous inflationary phenomena. In the case of cryptocurrencies, that homogeneous currency would not exist.
It is very likely that cryptocurrencies will end up becoming large amounts (or not) of bank currency. As for the crypto market, as an asset market, it will have to be regulated soon and with the greatest possible care.
Alejandro O. Asharabed Trucido
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