Trading in unbacked digital assets should be treated as gambling: ECB Executive board member

• High leverage, interconnectedness and the lack of a governance structure triggered the ‘chain’ of bankruptcies in 2022.
• The board member believes the world lost faith in crypto in 2022.

Crypto has “fundamental flaws”

Fabio Panetta, a member of the executive board of the European Central Bank (ECB) criticized players in the crypto currency market citing the list of bankruptcies filed in 2022. He claimed that crypto companies would go bankrupt in 2023 as well, suggesting that the 2022 crypto contagion was not over yet.

A long list of companies filed for bankruptcy in 2022. Poor market governance and regulations can be blamed for the failure of companies like FTX, but some companies closed down because of market conditions, which are normal economic reasons.

Mining companies like Compute Northa and Core Scientific filed for bankruptcy in the US after energy prices soared amid the Russia Ukraine war. The impact of rising energy prices was exacerbated by bitcoin’s falling price (most mining companies mine bitcoins) and a protracted bearish spell in the crypto market.

“Yet remarkably, the crypto market rout has left the financial system largely unscathed. Many therefore think it preferable to let crypto burn rather than regulate at the risk of legitimizing cryptos,” Panetta said.

Leaving cryptocurrencies unregulated not an option

Panetta expressed two reservations regarding the view that the world would not want to make the mistake of legitimizing crypto by regulating it.

Firstly, although the crypto market is failing, cryptos won’t ‘disappear’ any time soon because people love gambling and crypto is used essentially for that end. He argues that cryptos are unbacked securities and that they don’t provide any economic or social function – they can’t be used for investments due to volatility and are not used for consumption and payments.

And second, leaving crypto unregulated was dangerous because it is being used for major crimes like money laundering, tax evasion, terrorist financing and ‘the circumvention of sanctions.’

Added to that, millions lost money in the 2022 contagion. Panetta notes that several investors were caught “swimming naked.” It is important to protect investors who are vulnerable and are unaware.

“That is why we cannot afford to leave cryptos unregulated. We need to build guardrails that address regulatory gaps and arbitrage and tackle the significant social costs of cryptos head-on.”

Regulatory oversight shouldn’t be delayed by legislative hurdles

Panetta emphasized that regulation should address the speculative nature of crypto assets ‘and treat them as gambling activities.’ He suggested empowering regulatory authorities irrespective of legislative clearance because legislative processes are time consuming.

“Vulnerable consumers should be protected through principles similar to those recommended by the European Commission for online gambling. They should be taxed in accordance with the costs they impose on society.”

Panetta concluded by saying that governments and central banks across the world were developing Central Bank Digital Currencies (CBDCs) to preserve the role of the central bank as an ‘anchor’ in the financial system. He added that the CBDC would act as ‘a risk-free and dependable digital settlement asset.’

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

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