On April 25, 2022, European Central Bank Executive Board member Fabio Panetta delivered a speech at Columbia University in New York in which he was very critical of cryptoassets. As indicated in the title of the speech — “For a Few Cryptos More: the Wild West of Crypto Finance” — Mr. Panetta compared cryptocurrencies to the Wild West gold rush in the United States in the second half of the 19th century (while also working in a reference to Littlefinger, of Game of Thrones fame). The ECB’s point person on crypto regulation, Mr. Panetta compared the dynamics of the cryptocurrency market to a Ponzi scheme. The introductory parts of his remarks ended with the following:
So 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.
Mr. Panetta identified the following three channels of financial stability risk, even though he also acknowledged that linkages through the three channels are as yet still limited. First, stress in cryptoasset markets could spill over to players in the wider financial system through direct asset holdings or ownership of service providers. Second, a fall in the value of cryptoassets might have an impact on the wealth of investors, with knock-on effects on the financial system. Third, a loss of faith in the value of cryptoassets – for instance because of operational failures, fraud, price manipulation or cybercrime – could lead to a sharp deterioration in investor confidence, which could spill over to broader financial markets.
To Mr. Panetta, regulation cannot come fast enough and, while some countries have banned cryptoassets outright and others have heavily regulated them, the lack of uniformity is, in his view, unsatisfactory for a global phenomenon like cryptoassets. He identified four regulatory fronts as most pressing. First, the need to hold cryptoassets to the same standards as the rest of the financial system. This means swiftly implementing rules to prevent the use of cryptoassets for money laundering and terrorist financing, based on the standards set by the Financial Action Task Force (FATF), and enforcing them effectively.
The second issue concerns taxation. By its very nature, the cryptoasset market makes it very difficult to identify tax-relevant activities because it relies less on traditional financial intermediaries, who typically have reporting requirements. Mr. Panetta advocated for alignment of treatment across jurisdiction. But he also suggested a higher taxation rate for cryptoassets that use Proof of Work because of their energy consumption. Third, public disclosure and regulatory reporting need to be strengthened. And, fourth, given the crucial unanswered questions on issues such as operational risk, volatility and liquidity, regulators should introduce strict transparency requirements and set out the standards of conduct to be followed by professional operators in order to protect unexperienced retail cryptoasset investors.
Mr. Panetta noted that the EU is taking the lead on the regulatory front and that the finalization of the Regulation of Markets in Crypto-Assets (MiCA) will harmonize the regulatory approach across the EU. The United States is also taking action and the Financial Stability Board (FSB) has made progress in advancing a global agenda of work on crypto-assets. But, in his view, the world should not wait for a crisis to occur before creating a dedicated global policy forum to address the risks arising from cryptoassets.
