On Monday (April 25), Fabio Panetta, who is a Member of the Executive Board of the European Central Bank (ECB), gave a speech in which he talked about the rapidly rising popularity of cryptoassets, the dangers they poses, and the importance of adequately regulating them.
Here is how Panetta started his speech at Columbia University in New York:
“... crypto-assets are what everyone’s talking about. Crypto enthusiasts marvel at the rise of the crypto market, with many feeling they should take their chances on the crypto gamble. An ecosystem has emerged, from miners to intermediaries, all seeking to expand into digital finance. Crypto evangelists promise heaven on earth, using an illusory narrative of ever-rising crypto-asset prices to maintain inflows and thus the momentum fuelling the crypto bubble…
“But appearances are deceptive… Crypto-asset transfers can take hours to process. Their prices fluctuate wildly. The supposedly anonymous transactions leave an immutable trail that can be traced… Crypto-assets are bringing about instability and insecurity – the exact opposite of what they promised. They are creating a new Wild West.“
Rising Popularity of Crypto
“… the number of crypto-assets has expanded significantly, with around 10,000 available on the market today… Within that market is a fast-growing segment of decentralised finance, which uses smart contracts to support trading, lending and investment in crypto-assets – supposedly without relying on intermediaries… This supply of crypto-assets has been met with strong demand from both professional investors and the public.“
Public Policy Concerns
“Unbacked crypto-assets cannot fulfil their original objective of facilitating payments. They are simply too volatile to perform the three functions of money: medium of exchange, store of value and unit of account… And this is just as true for stablecoins, given the poor consumer protection and the vulnerability to panic selling that characterise them in the absence of appropriate regulation and supervision.
“Ransomware attackers usually demand crypto payments… Crypto-assets may also be used for tax evasion or to circumvent sanctions… Crypto-assets based on proof-of-work (PoW) blockchains can also cause huge amounts of pollution and damage to the environment.“
Financial Stability Risks
“Crypto-assets pose financial stability risks through three main channels… First, stress in crypto-asset markets could spill over to players in the wider financial system through direct asset holdings or ownership of service providers… Second, a fall in the value of crypto-assets might have an impact on the wealth of investors, with knock-on effects on the financial system… Third, a loss of faith in the value of crypto-assets – for instance because of operational failures, fraud, price manipulation or cybercrime – could lead to a sharp deterioration in investor confidence, which could spill over to broader financial markets.“
“The current regulatory approaches differ across countries. Some countries have banned crypto-assets outright while others have restricted their use. This situation is clearly unsatisfactory, as crypto-assets are a global phenomenon and their underlying technologies can play an important role, not only in finance… Regulation should balance the risks and benefits so as not to stifle innovation that could stimulate efficiency in payments and broader applications of these technologies…
“We need to see faster progress on many fronts.. Four of these are particularly relevant… First, we need to hold crypto-assets to the same standards as the rest of the financial system… Second, we should consider how to adequately tax crypto-assets… Third, public disclosure and regulatory reporting need to be strengthened…
“Fourth, given the crucial unanswered questions on issues such as operational risk, volatility and liquidity, regulators should introduce strict transparency requirements and set out the standards of conduct to be followed by professional operators in order to protect unexperienced retail crypto-asset investors.“
The views and opinions expressed by the author, or any people mentioned in this article, are for informational purposes only, and they do not constitute financial, investment, or other advice. Investing in or trading cryptoassets comes with a risk of financial loss.