ECB Executive Board Member on ‘Fundamental Flaws in Crypto Finance’

Recently, Dr. Fabio Panetta, a Member of the Executive Board of the European Central Bank (ECB), talked about crypto finance during a speech given at the Insight Summit held at the London Business School (LSB).

Panetta, whose speech was titled “Crypto dominos: the bursting crypto bubbles and the destiny of digital finance”, mentioned that we have seen some “painful bankruptcies” this year: “the crypto dominos are falling, sending shockwaves through the entire crypto universe, including stablecoins and decentralised finance (DeFi).”

He believes that “finance cannot be trustless and stable at the same time”, and that instead it “requires transparency, regulatory safeguards and scrutiny.”

Panetta argues that two things are needed to protect “inexperienced investors” (and to preserve “the stability of the financial system”):

  • ensuring that crypto-assets are subject to adequate regulation and taxation
  • a risk-free and dependable digital settlement asset, which only central bank money can provide

Furthermore, during his speech, he posits that “the risks associated with crypto finance stem from three fundamental flaws,”, which are as follows:

  • Unbacked crypto-assets offer no benefits to society
  • Stablecoins are exposed to runs
  • Crypto markets are highly leveraged and interconnected

On 30 November 2022, Ulrich Bindseil, who is Director General for Market Infrastructure and Payments (DG-MIP) at the ECB, shared his thoughts on Bitcoin.

The ECB is “the central bank of the European Union countries which use the euro.” Its main purpose is “to maintain price stability”, which it tries to do by “making sure that inflation remains low, stable and predictable.”

Ulrich Bindseil’s comments about Bitcoin were made in a blog post — published earlier today — jointly written with Jürgen Schaaf, who is an advisor to the Senior Management of the Market Infrastructure and payments business area of the ECB.

Bindseil and Schaaf wrote:

Bitcoin was created to overcome the existing monetary and financial system. In 2008, the pseudonymous Satoshi Nakamoto published the concept. Since then, Bitcoin has been marketed as a global decentralised digital currency. However, Bitcoin’s conceptual design and technological shortcomings make it questionable as a means of payment: real Bitcoin transactions are cumbersome, slow and expensive. Bitcoin has never been used to any significant extent for legal real-world transactions…

Large investors also fund lobbyists who push their case with lawmakers and regulators. In the US alone, the number of crypto lobbyists has almost tripled from 115 in 2018 to 320 in 2021. Their names sometimes read like a who’s who of US regulators…

But lobbying activities need a sounding board to have an impact. Indeed, lawmakers have sometimes facilitated the influx of funds by supporting the supposed merits of Bitcoin and offering regulation that gave the impression that crypto assets are just another asset class. Yet the risks of crypto assets are undisputed among regulators. In July, the Financial Stability Board (FSB) called for crypto assets and markets to be subject to effective regulation and supervision commensurate with the risks they pose – along the doctrine of ‘same risk, same regulation’…

Since Bitcoin appears to be neither suitable as a payment system nor as a form of investment, it should be treated as neither in regulatory terms and thus should not be legitimised. Similarly, the financial industry should be wary of the long-term damage of promoting Bitcoin investments – despite short-term profits they could make (even without their skin in the game). The negative impact on customer relations and the reputational damage to the entire industry could be enormous once Bitcoin investors will have made further losses.

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Featured Image via Pixabay

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