Fabio Panetta, a member of the European Central Bank (ECB) executive board, has advocated for regulators to classify unsecured digital currency trading as a form of wagering.
Panetta contends that these incidents are interconnected and reflect fundamental flaws and weaknesses in the way the digital currency market functions. “These failures are occurring in rapid succession, reflecting the high leverage of digital currency participants, their interconnectedness within the crypto ecosystem, and their inadequate governance frameworks,” stated Panetta. In 2022, the downfall of numerous digital currency projects, tokens, and platforms resulted in substantial losses for many individual investors. Some of the most notable failures include the collapse of the “stablecoin” TerraUSD in May, the 54% decline in the value of Bitcoin throughout the year, and the failure of digital currency exchange FTX. The economist also remarked on the limited spillover effects of the digital currency failures into broader markets. However, Panetta rejected the idea that digital currencies will generally “self-destruct” and vanish.
Activities involving wagering
The head of the central bank stated that while unbacked digital currencies don’t offer any genuine societal or economic benefit, they are seldom used for transactions, spending, or capital allocation – essentially, they resemble a form of wagering more than an economic instrument.
The central bank leader highlighted that as a form of investment, unbacked digital currencies also lack inherent worth. They are speculative assets. Those who invest in them do so solely with the aim of selling them at a higher price. He added, “In reality, they are gambling disguised as investment assets.”
“However, for this very reason, we can’t anticipate their disappearance. Individuals have always engaged in wagering in various forms. In the digital era, unbacked digital currencies are likely to remain a tool for gambling.”
The societal cost of digital currencies
Panetta also expanded on the societal costs of the uncontrolled digital currency market. He pointed out the substantial losses investors have incurred in various digital currency ventures.
“Unsuspecting investors have experienced significant losses,” he said. “It’s not just the digital currencies that have been lost.”
Beyond the direct societal consequences of the uncontrolled digital currency market, the former Italian central banker remarked that such digital assets enable criminals to avoid taxes, engage in money laundering, finance terrorism, and circumvent sanctions. He stated that digital currencies also present significant environmental challenges.
“This is why we cannot permit digital currencies to remain unregulated,” he said.
Its crucial to put in place safety measures, close regulatory gaps and loopholes, and directly tackle the substantial social costs associated with digital currencies.
Panetta acknowledged this wouldn’t be a simple task.
“Like Odysseus, they must resist the alluring call of crypto, lest they fall prey to the industry’s powerful lobbying efforts. On their journey, they must steer clear of the regulatory whirlpool of lax oversight and the treacherous undertow of legitimizing unsound crypto models.”
Current Structure
Panetta commended existing laws, such as the EU’s Markets in Crypto-Assets Regulation, but emphasized the need for “additional efforts” to ensure the entire industry is regulated, encompassing so-called “decentralized finance” activities, such as crypto asset lending or non-custodial wallet services. Panetta proposed a structure similar to the existing online gambling regulatory framework.
“Regulation should recognize the speculative nature of unsecured digital currencies and treat them as gambling activities,” he stated. “Vulnerable consumers should be shielded through principles similar to those recommended by the European Commission for online gambling. They should be taxed based on the societal costs they impose.”
