When I last spoke about crypto finance last April, I likened it to the Wild West and warned about the risks stemming from irrational exuberance among investors, negative externalities and the lack of regulation.[2]Crypto markets have since witnessed a number of painful bankruptcies.
Moving from the past to the future, today I will discuss crypto-assets and the destiny of digital finance.
The crypto dominos are falling, sending shockwaves through the entire crypto universe, including stablecoins and decentralised finance (DeFi).The crash of TerraUSD, then the world’s third-largest stablecoin, and the recent bankruptcy of the leading crypto
exchange FTX and 130 affiliated companies each took only a few days to unfold. This is not just a bubble that is
bursting. It is like froth: multiple bubbles are bursting one after another.
Investors’ fear of missing out seems to have morphed into a fear of not getting out.
The sell-off is exposing those “swimming naked”. It has laid
bare some unbelievably poor business and governance practices across a number of crypto firms. It has revealed
that some investors have been acting carelessly by investing blindly without proper due diligence. And similar
to the sub-prime crisis, the crash has uncovered the interconnections and opaque structures within the crypto
house of cards.
This is set to dampen enthusiasm in the belief that technology can free finance from scrutiny. The crash has
served as a cautionary reminder that finance cannot be trustless and stable at the same time.
Trust cannot be replaced by religious faith in an algorithm. It requires transparency, regulatory safeguards and
scrutiny.
Does this mean we are witnessing the endgame for crypto? Probably not. People like to gamble. On horse races,
football games and many other events. And some investors will continue to gamble by taking speculative positions
on crypto-assets.
Today I will argue that the fundamental flaws of crypto-assets mean that they can quickly collapse when
irrational exuberance subsides. We should therefore focus on protecting inexperienced investors and preserving
the stability of the financial system.
Ensuring that crypto-assets are subject to adequate regulation and taxation is one path to achieving this. Here,
we need to move rapidly from debate to decision and then implementation...
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