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Conditional disclaimer does not apply to crypto

The author is a member of the Executive Board of the European Central Bank

The last year marked the dissolution of the crypto market as investors went from fear of missing out to fear of not getting out.

TerraUSD—a stablecoin, which was stable in name only – was among the first to fall in a chain of collapses that have involved several lending platforms, a hedge fund, a leading crypto asset exchange and most recently a major US-listed crypto mining company case brought. More 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 throughout the crypto ecosystem, and their inadequate governance structures.

Remarkably, however, the financial system has remained largely unscathed by the crypto market crisis. Therefore, many consider it better cryptocurrencies let it burn rather than regulate it at the risk of legitimizing cryptocurrencies. Let me make two important reservations about this view.

First, despite their fundamental flaws, it is not certain that crypto assets will eventually self-ignite.

Take unsecured crypto assets for example. They serve no socially or economically useful function: they are rarely used for payments and do not finance consumption or investment. As a form of investment, unbacked cryptos also have no intrinsic value. They are speculative investments. Investors buy them with the sole aim of reselling them at a higher price. In fact, they are a gamble disguised as an investment.

But that’s exactly why we can’t expect them to go away. People have always played in many different ways. And in the digital age, unbacked cryptos will likely continue to be a vehicle for gambling.

Second, the cost to society of an unregulated crypto industry is too great to ignore. For one thing, this year’s crypto market collapse caught millions of investors by surprise. Uninformed investors suffered significant losses. Not only cryptos are burned.

Additionally, unregulated crypto assets can be used for tax evasion, money laundering, terrorist financing, and sanctions evasion. They also have high environmental costs.

This is why we cannot afford to leave cryptos unregulated. We have to build guard rails that close regulatory gaps and arbitrage shut down and tackle the significant social costs of crypto head-on.

That’s easier said than done. Regulators have to walk a tightrope. Like Ulysses, they must resist the beguiling crypto sirens lest they fall victim to intense industry lobbying. And on their journey, they must stay away from the Scylla of bad regulation and the Charybdis of legitimizing unsound crypto models.

The EU regulation on markets for crypto assets is an important step. It is crucial that it is implemented as soon as possible. However, more work needs to be done to ensure all segments of the industry are regulated, including decentralized finance activities such as crypto asset lending or non-custodial Wallet-Services.

Additionally, regulation should recognize the speculative nature of unsecured cryptos and treat them as gambling activities. Vulnerable consumers should be protected by principles similar to those recommended by the European Commission for online gambling. They should be taxed according to the costs they impose on society.

To avoid the risk of regulation lagging behind due to the time it takes for legislative processes, regulators and supervisors need to be empowered to keep up with crypto developments.

And to be effective and prevent regulatory arbitrage, regulation must have global reach. The Financial Stability Board’s recommendations on the regulation and oversight of crypto asset activities and markets should be finalized and applied as a matter of urgency, as should the rules recently published by the Basel Committee for the treatment of banking risks in cryptos.

However, regulation and taxation alone will not be enough to address crypto’s shortcomings. To lay solid foundations for the digital financial ecosystem, we need a risk-free and reliable digital settlement asset that only central bank money can provide. This is why the ECB and central banks around the world are working on retail and wholesale central bank digital currencies. By preserving the role of central bank money as the anchor of the payments system, central banks secure the trust on which private forms of money ultimately depend.

Source: Crypto News Deutsch

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