In a speech in New York, a member of the European Central Bank’s executive board, Fabio Panetta, criticised crypto finance for its lack of transparency and the risks it poses to financial stability, describing crypto-assets as “speculative assets that can cause major damage to society” and calling for a faster and more stringent regulation.
The speech Panetta gave at Columbia University on Monday (25 April) comes at a time when several EU regulations and directives concerning crypto finance are being debated in EU institutions.
Comparing the activity around crypto finance to the Wild West of the 19th century, Panetta called it “a digital gold rush beyond state control”.
“Crypto evangelists promise heaven on earth, using an illusory narrative of ever-rising crypto-asset prices to maintain inflows and thus the momentum fuelling the crypto bubble,” he said.
Referring to the purported developer of Bitcoin, the best known of all cryptocurrencies, Panetta said: “Satoshi Nakamoto’s dream of creating trustworthy money remains just that – a dream”.
“Crypto-assets are bringing about instability and insecurity – the exact opposite of what they promised. They are creating a new Wild West,” he said.
Panetta also criticised the high energy consumption of so-called “Proof of Work” (POW) principles that are the basis of some blockchain technologies like bitcoin. POW necessitates large amounts of computing power to solve mathematical problems, which is used to verify crypto transactions.
Energy consumption and financial stability concerns
According to the Cambridge Bitcoin Electricity Consumption Index, Bitcoin is on track to consume 148 terawatt hours of energy per year, which roughly corresponds to the annual energy consumption of Poland.
Panetta’s main worry is that a crypto bubble could endanger the stability of the financial system.
“The crypto market is now larger than the sub-prime mortgage market was when – worth $1.3 trillion – it triggered the global financial crisis,” he said, arguing that there were “strikingly similar dynamics” at play.
Unlike in the US sub-prime crisis, however, traditional banks and pension funds are not yet as exposed to crypto assets as they were to sub-prime mortgages.
A recent study assessing the risks to financial stability from crypto-assets, done by the Financial Stability Board (FSB), an international body that monitors the global financial system, found that crypto-assets markets were “fast evolving and could reach a point where they represent a threat to global financial stability.”
The FSB argued that, for now, episodes of high volatility in crypto markets did not spill over into financial markets. While the connections between crypto markets and systemically important financial institutions were “limited at the present time”, they were also “growing rapidly”.
ECB’s Panetta found this trend worrying. “Limited understanding of risks, fear of missing out and intense lobbying of legislators drive up exposures while slowing down regulation,” he said.
“We must not repeat the same mistakes by waiting for the bubble to burst, and only then realising how pervasive crypto risk has become in the financial system,” he said.
Just a Ponzi scheme?
Also on Monday, an interview with Sam Bankman-Fried, a crypto billionaire and founder of the cryptocurrency exchange FTX, caused a stir because he seemed to admit that a large part of crypto finance was essentially a Ponzi scheme, an investment fraud that pays existing investors with funds collected from new investors.
In his speech, Panetta also described the crypto markets as a Ponzi scheme, referring to them as a “house of cards”.
“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 said.
The EU is working on several legislative packages addressing the challenges posed by crypto markets. The Regulation of Markets in Crypto-Assets (MiCA) aims at harmonising the regulatory approach across the EU. Moreover, the anti-money laundering rules are being revised to include crypto-assets.
However, Panetta argued that “Europe’s regulatory measures need to go further”.
He suggested strengthening public disclosure and regulatory reporting requirements. Moreover, Panetta argued for higher taxation of some crypto-assets, for example, by internalising the environmental costs of energy-intensive blockchains.
[Edited by Zoran Radosavljevic]