04 January 2023

FT: ECB's Panetta: Caveat emptor does not apply to crypto

Last year marked the unravelling of the crypto market as investors moved from the fear of missing out to the fear of not getting out. TerraUSD — a stablecoin that was stable in name only — was among the first to fall in a chain of collapses that brought down several lending platforms, a hedge fund, a leading crypto asset exchange and most recently a large US-listed crypto mining company.

Other crypto companies are likely to be added to this list in the coming months. These failures occurred in rapid succession, reflecting crypto players’ incredibly high leverage, their interconnectedness across the crypto ecosystem and their inadequate governance structures. Yet remarkably, the crypto market rout has left the financial system largely unscathed. Many therefore think it preferable to let crypto burn rather than regulate at the risk of legitimising cryptos.

Let me voice two important reservations about this view. First, despite their fundamental flaws, it is not certain that crypto assets will ultimately self-combust. Take unbacked crypto assets, for instance. They do not perform any socially or economically useful function: they are rarely used for payments and do not fund consumption or investment. As a form of investment, unbacked cryptos lack any intrinsic value, too. They are speculative assets. Investors buy them with the sole objective of selling them on at a higher price.

In fact, they are a gamble disguised as an investment asset. But it is precisely for this reason that we cannot expect them to disappear. People have always gambled in many different ways. And in the digital era, unbacked cryptos are likely to continue to be a vehicle for gambling. Second, the cost to society of an unregulated crypto industry is too high to ignore. For one, this year’s crypto market meltdown caught millions of investors off guard. Uninformed investors were left with significant losses. It is not just cryptos that are being burnt. In addition, unregulated crypto assets can be used for tax evasion, money laundering, terrorist financing and the circumvention of sanctions. They also have high environmental costs....

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