European Central Bank official Fabio Panetta has argued that the crypto market cannot be trustless and stable without adequate transparency and regulatory safeguards.
Panetta while speaking at the London School of Economics on Dec. 7, said that the FTX implosion showed that crypto was a bubble waiting for the right time to burst. It exposed the poor business practices of crypto firms and a lack of due diligence by investors of all sizes.
Notwithstanding, Panetta said that the recent implosions may not be the endgame for crypto. To maximize the promise of crypto finance, he said that certain fundamental flaws of the crypto market need to be addressed.
On the first flaws of the crypto industry, Panetta argued that many crypto assets are unbacked which makes them too volatile and without intrinsic value. As a result, they cannot be used for digital payments but only serve as speculative assets.
Concerning stablecoin stability, Panetta argued that crypto assets (like UST) cannot maintain stable values based on codes alone, but with the backing of regulated banks like the ECB.
The ECB official noted that the widespread contagion following the Terra and FTX collapse shows that the crypto market is highly leveraged and interconnected. He warned that allowing leverage positions of up 125x will spread the associated risk throughout the crypto market.
Regulation as a way forward for crypto
Despite the fundamental flaws in the crypto market, Panetta argued that with appropriate regulatory measures, the economy can still harness the benefits of crypto finance.
For a start, Panetta recommends that the crypto market should be regulated with similar measures that are applied to other sectors of the financial market.
Regulatory frameworks like the EU’s Markets in Crypto-Assets (MiCA) will ensure that stablecoin issuers obtain an e-money license to regulate their reserves. Crypto asset issuers will also be mandated to inform investors of the inherent risk of buying any asset.
Since crypto assets are borderless, Panetta added that there is a need for a global regulatory framework that will protect consumers from crypto asset manipulations and reduce the risk of future contagions.