Fabio Panetta, a member of the European Central Bank’s (ECB’s) Board of Directors, has asked that regulators treat trading in unbacked cryptocurrencies as gambling.
In 2022, many investors suffered large losses due to the failure of several cryptocurrency platforms, coins, and schemes. Some notable failures are the implosion in May of TerraUSD, a “stable currency”, the annual decline of 54% in Bitcoin’s price and the collapse in FTX.
Panetta claimed that the events are related, reflecting factors such as structural inadequacies and the inadequacy of the crypto-market.
Panetta said that “these failures happened in rapid succession and reflect the high level of leverage crypto players have, as well as their interconnectedness within the crypto-ecosystem, along with their poor governance structures.”
He also noted that the failures of cryptos had not affected the market as a whole. Panetta, however, disputed the idea that cryptocurrency would “self-combust”.
Playing gambling is a form of activity.
Central bankers claim that unbacked cryptoassets are not useful for social or economic purposes, and are not used to fund investment or consumption. They are more commonly seen as gambling methods than economic instruments.
As an investment form, cryptos without backing also lack intrinsic value. These are assets that can be traded. “Investors purchase them solely to sell them at a greater price,” said he. In fact, these are gambling assets disguised as investment.
We cannot, therefore, expect that they will disappear. Gambling has always been a popular pastime. In the digital age, it is likely that unbacked cryptos will continue to be used as a gambling vehicle.
Cryptocurrency: The Social Cost
Panetta went on to elaborate the costs a cryptocurrency market that is unregulated has for society. He cited the huge losses suffered by many investors who invested in crypto-related businesses.
He said that “uninformed investors suffered significant losses.” It’s not only cryptos being burned.
The former Bank of Italy employee commented on the negative social effects of unregulated cryptocurrency markets. He said that bad actors could use digital assets to avoid taxes, money laundering, financing terrorism, and circumventing sanctions. He said that crypto poses important environmental issues.
He said, “We cannot leave cryptos unregulated.” We need to create guardrails which address arbitrage, regulatory gaps and the social costs associated with cryptos.
Panetta said that this would not be an easy process.
They must, like Ulysses resist the sirens of crypto to prevent falling victim to industry lobbying. On their journey they will have to avoid the Scylla that is poor regulation, and the Charybdis which is the legitimisation of unsound crypto-models.
Panetta praised existing laws, such as the EU Regulation on Markets for Crypto-Assets. However, he stated that more work was required to regulate the entire industry. This includes so-called decentralised finance activities like crypto asset lending and non-custodial e-wallet services. Panetta suggested a regulatory framework that is similar to online gambling.
He said that the regulation should recognize and consider unbacked cryptos as gambling. The European Commission has recommended that vulnerable consumers be protected by principles similar to the ones used for online gambling. Taxes should reflect the cost they have on society.