The Bank of Italy is worried about the growing importance of the cryptocurrencies

The Bank of Italy is worried about the growing importance of the cryptocurrencies as they consider the digital currencies a threat to financial stability.

The Bank of Italy has expressed its worries over the growing importance of cryptocurrencies, considering the digital currencies a threat to financial stability in a year when President Donald Trump of the United States has aligned himself with the bitcoin industry.

As the world's financial institutions are coping with the fallout from the Covid-19 pandemic, there has been a growing divergence in global financial perspectives.

The U.S. administration in particular has been notably more antagonistic on one side of the Atlantic with Trump’s administration showing more support for cryptocurrencies as part of a bigger push to introduce them into the U.S. financial system.

The former president has been very vocal in his support of Bitcoin (BTC) and other cryptoassets, pivoting on Friday to post a message on X, formerly Twitter, about the cryptocurrency in response to a user’s comment.

"I like Bitcoin. It's a remarkable currency—perhaps the most interesting of our time. I'm not surprised by the Bank of Italy's concerns; they're dealing with the implications of U.S. policy shifts under Trump, which could certainly lead to greater instability in the global financial markets if the U.S. retains the systemic importance we know it does."

The first Financial Stability Report of the year was published by the Bank of Italy on April 28. In it, the risks that are related to digital assets were described. The report dubs the inherent volatility of cryptocurrencies and how they are emerging as a large part of conventional finances, particularly in the U.S.

"The high price variability of these assets presents a relevant risk factor for investors and for the financial system as a whole, especially in the case of large price variations in a short period of time, such as those observed in March 2020, when the price of Bitcoin fell by about 60% in a week," the report said.

Moreover, the report presents how crypto is increasingly becoming linked with the real economy, and with established financial institutions. The growing integration of this exposure, especially as it spreads from nonfinancial companies and exchange traded funds (ETFs) to pure play crypto firms, may make systemic risk greater.

"The strong interest of nonfinancial companies in cryptoassets, also via ETFs, and the growing integration of crypto firms' exposure with that of conventional financial firms, in a limited but nonetheless increasing number of cases, may over time create new and broader channels for the transmission of shocks among financial institutions and markets, and thus generate greater systemic risk," the report stated.

The report also looked at stablecoins, which make use of the U.S. dollar very frequently as the peg. However, if these assets are to become systemic, their reliance on U.S. government bonds as backing could in fact introduce wider financial vulnerabilities.

"Stablecoins, if they become systemic, may present stability risks if their price stability is linked to the stability of the U.S. financial system and if they are massively adopted by the nonbank financial system as a means of payment," the report explained.

"The Bank of Italy is closely following the evolution of the crypto sector and any potential implications for the stability of the financial system," the report concluded.

The Italian central bank too expressed its governance concerns regarding the crypto sector. The study identified other risk factors such as the concentration of power among a small number of U.S. based crypto firms and potential conflicts of interest.

"The supervision of crypto firms is generally less strict than that of traditional financial institutions and is largely performed by the U.S. authorities, despite the growing presence of firms from other countries," the report noted.

However, the response from Italy’s banking system is not entirely positive. Intesa Sanpaolo, the country’s largest commercial bank, is apparently also working on its own cryptocurrency project, in a different way to the rest of the country’s financial sector.

The president’s administration has been showing more support for cryptocurrencies and a bigger push to introduce them into the U.S. financial system.

The administration is also coping with the implications for his case of U.S. policy shifts under Trump, which could certainly lead to greater instability in the global financial markets if the U.S. retains the systemic importance we know it does.

The statement that if the U.S. retains the systemic importance of cryptocurrencies, then the global financial markets will become more unstable.