Last year marked a turning point for the cryptocurrency industry. Investors have gone from fear of missing out on strong growth to fear of not getting rid of cryptocurrencies in time. Fabio Panetta, member of the Executive Board of the European Central Bank (ECB), thinks so. Regulators should treat unsecured digital assets as a gamble, he wrote today in a blog titled Unsecured Selling Does Not Apply to Cryptocurrencies.
"TerraUSD, a stablecoin that was stable in name only, was among the first to fall in a chain of collapses that brought down several lending platforms, a hedge fund, a leading cryptocurrency exchange and, most recently, a major cryptocurrency mining firm traded in the United States Of America. More cryptocurrency companies are likely to be added to this list in the coming months".
Troubles began to appear in quick succession. This showed the large share of borrowed money used by players in the cryptocurrency market, their interconnectedness across the cryptocurrency ecosystem, as well as their insufficient management structures. Still, it is remarkable that the crisis in the cryptocurrency market has left the financial system largely unscathed. As a result, many believe it is better to let cryptocurrencies burn than to regulate them and risk being seen as legitimate, Panetta writes.
" First, despite their fundamental flaws, it is not certain that cryptoassets will eventually collapse on their own. Take, for example, unsecured cryptoassets. They serve no socially or economically useful function: they are rarely used for payments and do not finance consumption or investment. As a form of investment, unsecured cryptoassets and any intrinsic value".
Panetta points out that cryptocurrencies are speculative assets that investors buy with the sole purpose of reselling them at a higher price. In reality, they are gambling disguised as an investment asset.
" But for this very reason, we cannot expect it to disappear. People have always gambled in many different ways. And in the digital era, unsecured cryptocurrencies will probably continue to be a means of gambling. Secondly, the cost to society of an unregulated cryptocurrency sector is too high to ignore. The crash in the cryptocurrency market caught millions of investors by surprise. Those uninformed were left with significant losses. The debacle is not just about cryptocurrencies".
An important step is the EU regulation on crypto-asset markets. According to Panetta, it is essential that it be implemented as soon as possible. But further work is needed to regulate all segments of the industry, including decentralized financial activities such as cryptoassets lending or non-custodial wallet services.
" In addition, regulation should recognize the speculative nature of unhedged cryptocurrencies and treat them as a gambling activity. Vulnerable consumers should be protected through policies similar to those recommended by the European Commission (EC) for online gambling. They should be taxed in accordance with the cost they represent to society ".
To avoid the risk of regulation falling behind due to the time required for legislative processes, according to the author, there is a need for regulatory and supervisory bodies to have the power to keep up with the development of cryptocurrencies. And for regulation to be effective and prevent regulatory arbitrage, it must have a global reach. The recommendations of the Financial Stability Board (FSB) on the regulation and supervision of crypto-asset activities and markets should be urgently finalized and implemented, as well as the rules recently published by the Basel Committee on how banks should deal with cryptocurrencies.
