Fabio Panetta, a member of the European Central Bank’s (ECB) governing board, has urged regulators to classify trading in digital currencies without backing as a form of wagering.
Panetta contends that the numerous downturns in the digital currency market in 2022, including the implosion of the “stablecoin” TerraUSD in May, the 54% decline in the value of Bitcoin throughout the year, and the failure of the digital currency exchange FTX, reflect fundamental issues and shortcomings in the way the digital currency market functions. These occurrences have led to substantial financial losses for numerous individual investors.
Panetta highlights that these failures have transpired consecutively, reflecting the high levels of borrowing by digital currency participants, their interconnectedness within the digital currency environment, and their inadequate governance frameworks.
The economist also remarked on the limited extent to which the digital currency failures have spread to broader markets. However, Panetta dismissed the assertion that digital currencies will typically “self-destruct.”
Activities associated with wagering
Financial institution heads have indicated that while unbacked digital currencies have not yielded any societal or economic advantages, they are seldom utilized for transactions and do not finance spending or capital ventures – essentially, they function more as a wagering mechanism than an economic instrument.
“As a form of investment, unbacked cryptocurrencies lack any inherent value. They are speculative assets. Individuals acquire them with the sole objective of reselling them at a higher price,” he stated. “In essence, they are gambling disguised as investment assets.”
“However, it is precisely for this reason that we cannot anticipate their disappearance. Individuals consistently engage in speculation in various forms. In the digital era, unbacked cryptocurrencies are likely to persist as a tool for speculation.”
The Societal Impact of Digital Currencies
Panetta also expanded upon the societal costs of an unregulated digital currency market. He highlighted the substantial losses investors have incurred in various cryptocurrency ventures.
“Uninformed investors have encountered significant losses,” he mentioned. “It’s not solely the cryptocurrencies that have been depleted.”
Beyond the direct societal repercussions of an unregulated digital currency market, the former Italian central banker remarked that such digital assets enable criminals to evade taxes, launder illicit funds, finance terrorism, and circumvent sanctions. He asserted that cryptocurrencies also present substantial environmental challenges.
“This is why we cannot permit cryptocurrencies to remain unregulated,” he declared.
Its crucial to establish clear limits, rectify flaws in the regulations, and address the significant challenges that digital currencies pose to society, Panetta stated.
This endeavor will not be straightforward, Panetta acknowledged.
“Similar to Odysseus, they must withstand the allure of the crypto siren and evade being deceived by the industry’s forceful lobbying efforts. On their journey, they must steer clear of the regulatory Scylla of lax oversight and the Charybdis of legitimizing flawed crypto models.”
Existing regulations
Panetta commended existing laws, such as the European Union’s Markets in Crypto-Assets Regulation, but asserted that “further efforts” are required to ensure the comprehensive regulation of the entire industry, encompassing activities like “decentralized finance,” such as lending digital assets or utilizing non-custodial wallets. Panetta proposed a framework akin to the rules governing online gambling.
“The regulations should acknowledge the inherent risk associated with cryptocurrencies lacking backing and treat them as forms of gambling,” he stated. “Individuals susceptible to exploitation should be safeguarded by rules analogous to those recommended by the European Commission for online gambling. They should be subject to taxation based on the societal issues they generate.”
