On April 25, Fabio Panetta, a member of the Executive Board of the European Central Bank (ECB), pushed for stricter regulations on cryptocurrencies to avoid any kind of “instability and insecurity” on a financial level.
Speaking at Columbia University, Panetta referred to the accelerated growth that the crypto market has achieved with a $1.3 trillion valuation, indicating that it is currently larger than any high-risk market was when the global financial crisis of 2008 started.
Globally coordinated efforts are needed to bring crypto-assets into a regulatory framework, says Executive Board member Fabio Panetta at @Columbia. We must not repeat past mistakes by waiting for the bubble to burst before acting https://t.co/dGo0HV0KmL
— European Central Bank (@ecb) April 25, 2022
The ECB Sees The Crypto Market as a Bubble Waiting to Pop
Panetta indicated that all this boom has been based on speculation and the promise of high and rapid returns, “exploiting regulatory loopholes that leave investors without protection.”
“We must not repeat the same mistakes by waiting for the bubble to burst, and only then realizing how pervasive crypto risk has become in the financial system.”
Panetta acknowledges that although crypto assets are not just speculative and high-risk investments. Still, he argues that they can affect state policies and the world’s financial stability.
Panetta also explained that stablecoins pose a risk to the nations —a stance that the ECB has already shared— as those responsible for minting tokens cannot guarantee “redeemability at par at any time” and do not have access to the “permanent facilities” offered by a Central Bank. He added that a third of the stablecoins launched in recent years have not survived.
Volatile Cryptocurrencies Cannot Fulfill Their Purpose
According to Panetta, the volatility and lack of proper backing prevent crypto assets from fulfilling their purpose, which is to facilitate payments or become a better version of traditional money. Panetta pointed at the 60% drop that Bitcoin had after reaching $68,000, which was higher than that of gold and four times higher than that of U.S. stocks.
“[Cryptocurrencies] are simply too volatile to perform the three functions of money: medium of exchange, store of value and unit of account.”
Due to the accelerated adoption of the global cryptocurrency ecosystem, Panetta proposes a greater control in the global regulatory approach. He expressed his concerns about how even countries that have banned crypto cannot ensure their mandates are 100% effective.
“We need globally coordinated regulatory action to address issues such as the use of crypto-assets in cross-border illicit activities or their environmental footprint. 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”.
Panetta focused on 4 relevant points to achieve better control over crypto assets:
Hold them to the same standards as the rest of the financial system.
Tax them adequately since the current tax treatment is minimal.
Strengthen public disclosure.
Introduce strict transparency requirements and standards to be followed by professional operators.
Therefore, this new regulation does not seek to stifle innovation but to protect people’s money and savings. But it would also go a long way to ensure that central banks do not lose the economic control they have had for years.