Italy Warns: Trump's Crypto Adoption Poses Major Global Financial Risk

The Bank of Italy has cautioned that President Donald Trump’s strong efforts to legitimize cryptocurrencies might destabilize the worldwide financial system.

In a financial stability report released on Tuesday, authorities in Rome warned that as the U.S. increasingly backs cryptocurrency assets, these digital currencies could become significant enough that their potential downfall might severely impact banks, bond markets, and the broader economy.

Based on the Bank's report:

The significant expansion of Bitcoin along with other cryptocurrency assets characterized by substantial price fluctuations presents risks not just to investors but also possibly to overall financial stability. This is due to the increasing connections between the digital asset market, the conventional finance industry, and the actual economy.

They noted that it's not only retail investors putting money into cryptocurrency anymore. The connections betweencryptoand traditional finance have become strong enough to cause significant repercussions if the situation worsens.

Italy sounds the alarm over stablecoin risks following Trump’s crypto promotion

The Bank of Italy emphasized that Trump’s victory in November and his subsequent inauguration in January facilitated increased interest in cryptocurrencies within Washington. They pointed out that U.S. legislators, capitalizing on the energy from the fresh presidential term, have swiftly moved to establish regulations specifically aimed at stablecoins.

A Senate bill has garnered sufficient support to proceed. The Bank of Italy cautioned that this political climate might expedite cryptocurrency’s adoption into everyday use.

European authorities are not particularly pleased with this development either. Francois Villeroy de Galhau from France and Olli Rehn from Finland, who both serve as policymakers at the European Central Bank, expressed significant concerns regarding cryptocurrencies becoming widely accepted in the United States.

Rehn stated directly on Monday, "I am quite worried about the potential widespread adoption of crypto assets in the U.S." European authorities are apprehensive that if stablecoins, particularly those pegged to the dollar, gain significant traction during Trump's tenure, the resulting impacts could severely affect global economies.

The Bank of Italy highlighted that apart from dollar-pegged coins, there are also stablecoins linked to the euro and various other assets. They cautioned that although dollar-linked stablecoins have generally maintained their stability, the broader cryptocurrency market continues to be extremely unpredictable.

The central bank of Italy stated that the extreme fluctuations in prices for these assets highlight the significant risks involved should they become more deeply integrated into the conventional financial sector. The country’s report further noted:

Following the inauguration of the new US administration and after they announced their plans to encourage the adoption of cryptocurrency assets, there was a brief yet significant rise in worldwide market prices for these instruments, encompassing even those with high speculation levels.

They emphasized that the greater the intersection between cryptocurrency and traditional finance, the more vulnerable the whole system becomes.

Italy says stablecoin crash could hit bonds and spread chaos

The worst-case situation envisioned by Italy's central bank involves a stablecoin provider facing collapse. According to the report, many leading stablecoin companies largely rely on short-term U.S. Treasury securities as backing for their digital coins. In case such an entity were to fail, this might trigger a frenzied dash from token owners trying to redeem them.

The report stated, "In case of a malfunction in one of the aforementioned systems, there might be a surge in reimbursement demands, leading to an abrupt rise in liquidity redemption requests from stakeholders and necessitating the compulsory disposal of reserve assets."

The Bank of Italy warned If everybody attempts to offload their Treasury assets simultaneously, the U.S. government bond market would face severe repercussions. This pressure wouldn't be isolated; the disruption would cascade into banking systems, investment firms, and critical sectors globally. The scenario they described envisages how a single cryptocurrency collapse could trigger an unanticipated chain reaction throughout the economic landscape.

The financial stability report highlighted that this is among the initial ones issued following President Trump's imposition of tariffs, which triggered significant market unrest. Despite some easing of market pressures since April, the Bank of Italy noted that overall risks remain elevated relative to pre-Trump times. The report underscored that minor policy adjustments currently hold greater implications due to the heightened volatility within the economic landscape.

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