Trading in unbacked digital assets should be treated by regulators like gambling, according to a leading European banker.
The latest output from the European Central Bank (ECB) offers very little sympathy towards the crypto industry and takes a step away from the notion of regulating the crypto market in a way similar to traditional finance.
“Regulation should acknowledge the speculative nature of unbacked cryptos and treat them as gambling activities,” said Fabio Panetta, an executive board member at the ECB.
Vulnerable consumers should be protected through principles similar to those recommended by the European Commission for online gambling, he suggests. “They should be taxed in accordance with the costs they impose on society.”
In a blog post titled "Caveat emptor does not apply to crypto", Latin for "let the buyer beware", the central banker is unrelenting in his takedown of digital assets.
“Unregulated crypto-assets can be used for tax evasion, money laundering, terrorist financing and the circumvention of sanctions,” he pointed out, additionally noting high environmental costs.
It is issues such as this that mean crypto cannot be left unregulated, he said. “We need to build guardrails that address regulatory gaps and arbitrage, and tackle the significant social costs of cryptos head-on.
“This is easier said than done. Regulators must walk a tightrope. Like Ulysses, they must resist the beguiling crypto sirens to avoid falling prey to the industry’s intense lobbying,” he said. “And on their journey, they must steer clear of the Scylla of poor regulation and the Charybdis of legitimising unsound crypto models.”
It is possible that the downturn and bad press that crypto has endured over the last 12 months has encouraged Panetta and his colleagues to be more outspoken on the matter.
“Last year marked the unravelling of the crypto market as investors moved from the fear of missing out to the fear of not getting out,” said Panetta.
For example, TerraUSD, which Panetta comments was “a stablecoin that was stable in name only”, was among the first to fall in a chain of collapses that brought down several lending platforms, a hedge fund, a leading crypto-asset exchange and, most recently, a large US-listed crypto mining company.
Although not directly named in the blog, the recent FTX scandal is likely to keep the negative headlines surrounding crypto coming for the foreseeable future, with its founder, Sam Bankman-Fried, facing a trial on charges of fraud and conspiracy to commit money laundering.
“These failures occurred in rapid succession, reflecting crypto players’ incredibly high leverage, their interconnectedness across the crypto ecosystem and their inadequate governance structures,” said Panetta.
Panetta, who has served as chair of the Euro Retail Payments Board since 2020, summarised his points by noting that regulation and taxation alone will not be enough to address what he feels are crypto’s shortcomings.
“To build solid foundations for the digital finance ecosystem, we need a risk-free and dependable digital settlement asset, which can only be provided by central bank money,” he said, stating that this is a justification for the ECB and others to work on both retail and wholesale central bank digital currencies.
“By preserving the role of central bank money as the anchor of the payment system, central banks will safeguard the trust on which private forms of money ultimately depend.”
Panetta is not the first critic of crypto in Frankfurt.
Christine Lagarde, the governor of the ECB, told a Dutch television audience in May last year that crypto-assets are highly speculative and were not worth their time.
Meanwhile, other regulators have been more nuanced.
For example, Jon Cunliffe, the Bank of England’s deputy governor, spoke in a speech in November about the opportunities for technological innovation that have been sparked by crypto.
“The technologies that have been pioneered and refined in the crypto world, such as tokenisation, encryption, distribution, atomic settlement and smart contracts, not only seem unlikely to go away as our everyday lives become more digital, but may well have the potential to improve efficiency, functionality and reduce risk in the financial system,” he said.