Fabio Panetta, a board member of the European Central Bank (ECB), has advocated for regulators to approach the trading of unbacked cryptocurrencies as gambling.
The failure of a number of cryptocurrency schemes, coins, and platforms in 2022 resulted in significant losses for many retail investors. Some of the more famous failures include the May implosion of "stable coin" TerraUSD, a 54% year-on-year drop in Bitcoin's price, and the collapse of crypto trading platform FTX.
Panetta contended that these incidents were linked, suggesting structural issues and flaws in the crypto market's operation.
“These failures occurred in rapid succession, reflecting crypto players’ incredibly high leverage, their interconnectedness across the crypto ecosystem and their inadequate governance structures,” said Panetta.
The economist also mentioned how little contagion has occurred from the crypto failures to the broader market. Panetta, on the other hand, denied that cryptocurrencies will "self-combust" out of existence.
Gambling is a form of entertainment.
According to central bankers, while unbacked crypto assets serve no social or economic purpose, they are rarely used for payments and do not fuel consumption or investment - in the end, they are better understood as a sort of gambling than than an economic instrument.
“As a form of investment, unbacked cryptos lack any intrinsic value, too. They are speculative assets. Investors buy them with the sole objective of selling them on at a higher price,” he said. “In fact, they are a gamble disguised as an investment asset.”
“But it is precisely for this reason that we cannot expect them to disappear. People have always gambled in many different ways. And in the digital era, unbacked cryptos are likely to continue to be a vehicle for gambling.”
The societal cost of cryptocurrency
Panetta also discussed the societal consequences of an unregulated bitcoin economy. He cited substantial losses suffered by investors in a variety of cryptocurrency enterprises.
“Uninformed investors were left with significant losses,” he said. “It is not just cryptos that are being burnt.”
Aside from the immediate societal repercussions of an unregulated cryptocurrency market, the former Bank of Italy official stated that such digital assets allow bad actors to evade taxes, launder money, finance terrorists, and avoid sanctions. He also stated that cryptocurrency raises substantial environmental concerns.
"That is why we cannot afford to leave cryptocurrencies unregulated," he stated. "We need to put in place safeguards that address regulatory gaps and arbitrage, as well as confront the substantial social implications of cryptos head on."
This will not be an easy task, according to Panetta.
“Like Ulysses, they must resist the beguiling crypto sirens to avoid falling prey to the industry’s intense lobbying. And on their journey, they must steer clear of the Scylla of poor regulation and the Charybdis of legitimising unsound crypto models.”
Panetta praised existing legislation, such as the EU's Regulation on Markets in Crypto-Assets, but warned that "additional effort" was required to guarantee that the entire industry is regulated, which included so-called "decentralised finance" activities like crypto asset lending or non-custodial wallet services. Panetta recommended a structure similar to the existing framework for regulating online gambling.
“Regulation should acknowledge the speculative nature of unbacked cryptos and treat them as gambling activities,” he said. “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.”
By fLEXI tEAM