A senior official of the European Central Bank has delivered a scorching assessment of the state of the crypto industry and has called for faster action by lawmakers across the world to introduce rules for cryptocurrencies.
Fabio Panetta, the ECB executive board member who heads up the digital euro project, has slammed cryptocurrencies as a modern version of America's Wild West gold rush, which could have dire impacts on the stability of the financial system if left unchecked.
At a speech at Columbia University in New York, Panetta said Satoshi Nakamoto, the author of the 2008 paper describing Bitcoin, showed "great fascination" with cryptography but lacked an "in-depth understanding of payment and money issues".
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Today's crypto market was characterized by an "opaque" ecosystem of miners, exchanges, and unregulated wallets.
Panetta said that with "unbacked" crypto-assets nobody is liable, nor are these assets backed by any collateral or managed by a trustworthy operator. "This makes them purely speculative in nature, and hence highly volatile," he warned.
The greatest concern with unbacked cryptocurrencies, however, relates to their use in illegal actives and their price volatility, and also the concentration of ownership with already wealthy people. He compared the current state of the crypto market to a Ponzi scheme.
"As a result, many invest without understanding what they are buying. Like in a Ponzi scheme, such dynamics can only continue as long as a growing number of investors believe that prices will continue to increase and that there can be fiat value unbacked by any stream of revenue or guarantee. Until the enthusiasm vanishes and the bubble bursts," said Panetta.
"Crypto-assets are speculative assets that can cause major damage to society. At present they derive their value mainly from greed, they rely on the greed of others and the hope that the scheme continues unhindered. Until this house of cards collapses, leaving people buried under their losses," he warned.
Crypto-assets are only 1% of of total financial assets worldwide. Therefore, linkages to the broader financial system are limited. However, he warned that situation could change quickly if, for example, a big tech company launched a cryptocurrency.
"By exploiting their large customer bases and bundling payments and other financial services, big tech firms could significantly strengthen linkages between the crypto-asset ecosystem and the broader financial system," Panetta warned.
"In a stress situation, a sudden surge in redemptions by stablecoin holders could lead to instability in various market segments."
The ECB official wants to see a globally coordinated effort to regulate cryptocurrencies and for central banks to accelerate the issuance of CBDCs (central bank digital currencies), such as the proposed digital euro and China's digital yuan.
"We need to make coordinated efforts at the global level to bring crypto-assets into the regulatory purview. And we need to ensure that they are subject to standards in line with those applied to the financial system," said Panetta.
"We should make faster progress if we want to ensure that crypto-assets do not trigger a lawless frenzy of risk-taking."
He called for globally harmonized rules to prevent the use of crypto-assets for money laundering and terrorist financing, and to "bring peer-to-peer crypto-asset transfers within the scope of the standards for anti-money laundering (AML) and countering the financing of terrorism (CFT)."
Governments should also tax crypto-assets just like other financial instruments consistently across jurisdictions, in addition to imposing reporting requirements for transactions above certain thresholds.
Due to emissions caused by compute-intensive crypto mining, he said there could be a case for taxing proof-of-work (PoW) blockchains at higher levels than other financial instruments.
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Rules for public disclosure and regulator reporting also need be strengthened. "Mandatory disclosure requirements for financial institutions are necessary to pinpoint where risks emanating from crypto-assets are concentrated," Panetta said.
He said Europe was making headway on its crypto-regulation proposal, but that the regulations needed greater focus on crypto transfers conducted without service providers and on-chain, peer-to-peer transfers.
But he also acknowledged that today there is simply growing consumer demand for digital assets and instant payments, which means it's up to public authorities like central banks to meet this demand.
"Central banks must engage even more with digital innovation by upgrading wholesale financial infrastructures, operating fast retail payment systems and preparing for the issuance of central bank digital currencies," he said.
But US US secretary of the Treasury Janet Yellen, who US President Joe Biden tasked with producing a Future of Money report, recently said a US digital dollar issued by the Federal Reserve could be years away.