“Crypto-assets have Become The Bubble of a Generation”: ECB

European Central Bank or ECB officials propose a ban on tokens with an “excessive ecological footprint.”

Crypto Dominos

At the LBS’s Insight Summit 2022, Fabio Panetta, ECB Executive Board member, says Crypto assets have become the bubble of a generation.

He discussed crypto-assets and the destiny of digital finance. He said “Crypto markets have since witnessed a number of painful bankruptcies. The crypto dominos are falling, sending shockwaves through the entire crypto universe, including stablecoins and decentralised finance (DeFi).”

He warned about the risks stemming from irrational exuberance among investors, negative externalities and the lack of regulation.

He also added about the recent crashes in the crypto industry. The crash of TerraUSD, then the world’s third-largest stablecoin, and the recent bankruptcy of the leading crypto exchange FTX and 130 affiliated companies each took only a few days to unfold.

He noted all this as “This is not just a bubble that is bursting. It is like froth: multiple bubbles are bursting one after another.”

He argued the fundamental flaws of crypto-assets mean that they can quickly collapse when irrational exuberance subsides. Thus it needed to focus on protecting inexperienced investors and preserving the stability of the financial system. So, ensuring that crypto-assets are subject to adequate regulation and taxation is one path to achieving this.

“The crypto crash has served as a cautionary reminder that finance cannot be trustless and stable at the same time. Trust requires transparency, regulatory safeguards and scrutiny,” Mr. Panetta said.

Mr. Panetta pointed the risks of crypto finance stem from three main flaws:

1. Unbacked crypto-assets offer no benefits to society

2. Stablecoins are not as stable as they claim to be

3. Crypto markets are highly leveraged and interconnected

He said there’s an urgent need for regulation to protect consumers, define risk management and corporate governance, and reduce the contagion risks of stablecoins. He advised taxing crypto-assets according to their social costs, including tax evasion and environmental impact.

Furthermore, the digital finance ecosystem needs an anchor of stability in the form of a digital risk-free asset, which only central bank money can provide. Thus the ECB is working on a digital euro and the future of wholesale settlement using central bank money.

The ECB is working on a digital euro while also considering new technologies for the future of wholesale settlement in central bank money.

Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing