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A top official at the Banque de France has published a new article in which he questions whether crypto can recover from the “spectacular blow-ups” of 2022. Meanwhile, banking executives on opposing sides of the debate weigh in.
Will 2022 go down in history as the year that marked “the beginning of the end” for crypto-assets and decentralised finance (defi)?
That is the question asked by Denis Beau, first deputy governor of the Banque de France, in his latest public musings on the rise and fall of crypto and its regulatory implications for 2023.
While accepting that the growth of crypto-assets has been “very rapid and creative”, Beau argued that a side effect of this growth has been a worrying rise in “risks and losses” faced by crypto businesses and their clients.
“Some of the blow-ups have been spectacular, with the collapse of the third largest ‘stablecoin’ system, Terra-Luna, the bankruptcy of FTX, and its knock-on effects on other players in the ecosystem,” he said.
“These events have wiped close to 70 percent off the market value of crypto-assets, taking it back to where it was at the start of 2021.”
Although Beau argued that we have probably not yet seen the full impact of the major crypto bankruptcies of 2022, he said there are a number of lessons that we can already draw from them.
Most importantly, Beau argued, the crypto industry must go back to basics when it comes to the “general principles” of organisation and resources.
For example, governance, internal controls, protection of clients’ assets, and accounting and transparency standards must come up to par with that of traditional financial services, he said, if crypto is to avoid further turbulence in 2023.
“Up until now, these principles have only applied to a very limited scope of crypto-asset players, and their content has varied from one jurisdiction to another and tended to be lenient, on the grounds that these players help to disseminate innovation and should not be unduly stifled,” said Beau.
“The difficulties some players have found themselves in — the cross-border contagion effects, the losses and thefts faced by clients — all of this makes it crucial that we now reconsider this policy and move rapidly towards broader, more stringent and more harmonised regulatory requirements.”
At the domestic, European and international levels, Beau said that major regulatory forums, institutions and jurisdictions must seize the opportunity to align their regulatory frameworks with one another.
In particular, recommendations from the G20 and the Financial Stability Board (FSB) on consumer protection, financial stability and anti-money laundering must be rapidly adopted.
In France, Beau said the central bank and the prudential regulator are “convinced” that the crypto and defi worlds can develop “usefully and sustainably” with a regulatory framework that guarantees trust.
“This framework should aim to create a level playing field for all market players, and hence prevent the damage caused by ‘rogue’ players, which is what we have seen up to now,” he said.
“It should also aim to strike a balance between the goals of protecting customers and safeguarding financial stability on the one hand, and the operational realities faced by these players on the other.”
With the EU’s Markets in Crypto-Assets Regulation (MiCA) set to come into force over the next 18 months, Beau said Europe is already leading the way.
Additionally, in the meantime, Beau said France is currently debating a proposal that would significantly tighten the regulatory approval process for Digital Assets Providers (DASPs).
At present, companies need only register themselves with the authorities to obtain DASP status - the baseline level of regulatory screening, based largely on anti-money laundering (AML) controls.
However, so far zero companies have obtained a DASP licence - which requires a much more rigorous screening process.
“France should switch as soon as possible to the compulsory authorisation of DASPs rather than simply requiring their registration,” said François Villeroy de Galhau, governor of the Banque de France.
“And this needs to happen well before MiCA enters into force, to create the necessary framework of trust.”
Dimon v Diamond in the battle for crypto credibility
As might be expected, not all banking executives are as hopeful as Beau that, with the right regulation, the crypto industry can become a “useful” and “sustainable” one.
Jamie Dimon, CEO of J.P. Morgan, for example, has had a hot-cold relationship with crypto over the years, but now seems to be firmly in the crypto sceptic camp.
Speaking at the 41st Annual J.P. Morgan Healthcare Conference this week, Dimon described bitcoin as a “decentralised Ponzi scheme”.
This is not the first time Dimon has made such a claim. Last September, speaking at a US congressional hearing he likened all crypto-assets, including bitcoin, to “decentralised Ponzi schemes”.
Perhaps not as damning, but on the same crypto sceptic spectrum, were the remarks made this week by Fabio Panetta, executive board member at the European Central Bank (ECB).
Writing in an ECB blog post, Panetta likened crypto-asset trading to gambling, and argued that both activities should be regulated in the same way.
Meanwhile, Bob Diamond, a former banker who held various executive posts, including CEO, at Barclays between 1996 and 2012 echoed many of Beau’s views.
In an interview with the Financial Times this week, Diamond said he too believes digital currencies have a “very important place” in finance, despite the beating they took in 2022.
“I don’t think as an industry we’re going to throw the baby out with the bathwater,” said Diamond, co-founder and CEO of Atlas Merchant Capital, a global private equity and investment firm.
“The optimist in me hopes that this is a catalyst for more effective and more focused regulation and development of areas such as stablecoins and blockchain technology for onshore and approved uses.”
In 2021, Diamond’s Atlas Merchant Capital invested in US-based stablecoin issuer Circle, and in 2022 he almost took Circle public through a $9bn deal with Concord Acquisition Corp, where he serves as chairman.
That deal was terminated on mutual terms in December last year, but Diamond remains bullish on Circle, and stablecoins more generally, going into 2023.
“There’s going to be a lot of good things” that survive last year’s crypto crash, he said.
