Fabio Panetta, a member of the board of the European Central Bank, called for more regulation of global cryptocurrencies on Monday during a speech at Columbia University. He said globally coordinated efforts are needed to bring crypto-assets into a regulatory framework.
Panetta argued that unbacked crypto-assets can’t even fulfil their objective of facilitating payments, since they are, in his view, too volatile to perform as money. He called for a regulatory framework that would seek a balance between innovation, financial stability and consumer protection.
For example, between November 2021 and January 2022, Bitcoin prices fell from roughly USD 68,000 to about USD 38,000. Their three-month volatility was 60%, almost five times higher than gold and four times higher than US stocks.
“Such high volatility also means that households cannot rely on crypto-assets as a store of value to smooth their consumption over time,” Panetta said. “Similarly, firms cannot rely on crypto-assets as a unit of account for the calculation of prices or for their balance sheet.”
Crypto-assets market bigger than sub-prime mortgages in 2007
Panetta argued that crypto-assets already have a larger market than sub-prime mortgages prior to the start of the financial crisis. This has the potential to create systemic risk, he explained, allowing more exposures and vested interests to be built up. In a stress situation, a sudden surge in redemptions by stablecoin holders could lead to instability in various market segments.
For example, Tether, one of the most popular stablecoins, promises stability by investing in low-risk assets, such as commercial paper, and holds a large proportion of the stock of these instruments in circulation. Large-scale sales of these assets in response to a sudden increase in redemptions could generate instability throughout the commercial paper market. This phenomenon could spread to other stablecoins and related sectors, eventually finding its way to the banks that hold the stablecoins’ liquidity.
More international effort needed on crypto regulation
While regulation of cryptocurrencies is progressing swiftly, Panetta called for more globally coordinated efforts to bring cryptocurrencies into the regulatory framework and ensure they follow the same standards as the rest of the financial system.
He made the following proposal in his speech, which shed some light on what a future central bank regulatory framework might look like for cryptocurrencies:
- Cryptocurrencies to hold the same standards as the rest of the financial system – e.g. implementing all rules to prevent their use for money laundering or terrorist financing;
- Taxation of cryptocurrency assets to be brought into line with that of other instruments, and taxation to be aligned across jurisdictions;
- Stronger public disclosure and regulatory reporting – e.g. mandatory disclosures by financial institutions;
- Strict transparency requirements that set out standards of conduct to be followed by the cryptocurrency industry to protect retail investors.
“Europe’s regulatory measures need to go further,” Panetta said. “We need to focus more on unbacked crypto-asset activities that are undertaken without service providers. In addition, we cannot afford to leave on-chain peer-to-peer payments unregulated, as they can be used to circumvent any regulation. Finally, if we really want to harmonise supervision significantly across all EU Member States, the new European AML Authority should supervise the riskiest crypto-asset providers.”
He said the role of central banks would be to engage more closely with digital innovation by upgrading wholesale financial infrastructures, and operating fast retail payment systems, as well as preparing for the issuance of central bank digital currencies.