What the ECB Thinks about the Future of the Crypto Market

After an article calling Bitcoin obsolete, the ECB is back at it again against cryptocurrencies through the speech of Fabio Panetta, a member of the ECB’s executive board.

European central banks are on the offensive. The bankruptcies of 2022 and the fall in cryptocurrency prices seem to justify a new salvo of criticism and calls for regulation from monetary institutions.

On November 30th, two ECB executives published a murderous bill about Bitcoin, which they believe is doomed to failure. Speculative, polluting, and beneficial to only a few large investors, Bitcoin would accumulate defects.

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Not only Fabio Panetta denies of bitcoin

The member of the European Central Bank’s Executive Board spoke on December 7th at the Insight Summit at the London Business School.

The title of his speech is enough to summarize its content: “Crypto dominoes: the bursting of crypto bubbles and the fate of digital finance.” However, this is not an inflection on his part, as he himself indicated.

Back in April, Panetta compared crypto finance “to the Wild West” and warned, “of the risks arising from irrational investor exuberance, negative externalities and lack of regulation.”

Governance flaws illustrated by UST and FTX

The latest events, such as the collapse of TerraUSD and FTX, would therefore confirm his warnings.

“This is not just a bubble bursting. It’s like foam: multiple bubbles bursting one after the other,” said the ECB representative.

And fear is now gripping investors, who were previously worried that they would not benefit from the financial (and especially speculative) advantages of crypto. Panetta retains several lessons from the crises of 2022.

In particular, he emphasizes “the incredibly poor business and governance practices in place at a number of crypto companies.” These failures cannot be denied and are recognized in the industry.

Crypto or “religious faith in an algorithm”

The central bank executive also pins “some investors” for their “reckless way” of investing “blindly without doing due diligence.” He goes so far as to draw a parallel with the subprime crisis, which this time concerns traditional finance.

The crash exposed the interconnections and opaque structures within the crypto house of cards,” judges Fabio Panetta, for whom finance cannot transform digitally without trust.

“Trust cannot be replaced by religious faith in an algorithm. It requires transparency, regulatory guarantees, and control,” he reacted. The ECB member, however, does not predict the end of crypto finance.

Regulation will not be enough to protect

He believes that the industry owes its survival solely to the appetite of investors for gambling.

“People like to gamble. On horse races, soccer games, and many other events. And some investors will continue to bet by taking speculative positions in crypto-assets.”

However, doesn’t this observation also apply to TradFi and its financial products? Nevertheless, when it comes to crypto finance, Panetta believes that, at the moment, the challenge is “to protect inexperienced investors and preserve the stability of the financial system.”

And that means regulating crypto-assets through proper regulation and taxation. But even regulation will not be enough to fill the gaps in cryptos,” he warned.

CBDC, the only option for digital finance

Thus, the ECB defends a modernization of finance and its digitalization thanks to “solid foundations” serving an ecosystem that goes far beyond crypto. This robustness requires “a risk-free and reliable digital settlement asset.”

For a monetary institution, such an asset can only be a central bank digital currency, more commonly known as CBDC. That’s why the ECB is working on a digital euro while considering new technologies for the future of wholesale settlement in central bank money.”

So a radically different alternative to crypto-currencies is being advocated here. According to Panetta, crypto is based on the philosophy that “it is possible to build a trustless but stable financial system based on technology. This is an illusion […] It is precisely the lack of regulation and public oversight that has blinded investors to the risks involved, leading to the rise and then fall of crypto assets,” he concluded.

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(Featured image by Brun-nO via Pixabay)

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First published in Coins.fr, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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