Regulators Should Treat Unsecured Digital Currency Trading as Gambling: ECB Official

A governing body member of the European Central Bank (ECB), Fabio Panetta, has urged regulators to classify unsecured digital currency trading as a form of wagering.

Panetta postulates that the numerous failures of cryptocurrency projects, tokens, and platforms in 2022, which resulted in substantial financial losses for many individual investors, are interconnected and indicative of inherent weaknesses and shortcomings in the way the digital currency market functions.

Among the most notable collapses are the implosion of the “stablecoin” TerraUSD in May, the 54% decline in the value of Bitcoin throughout the year, and the downfall of the cryptocurrency exchange FTX.

“These failures, occurring in rapid succession, reflect the high degree of leverage employed by cryptocurrency participants, their interconnectedness within the digital currency ecosystem, and their inadequate governance frameworks,” stated Panetta.

The economist also addressed the limited extent to which the fallout from cryptocurrency failures has impacted the broader financial market. However, Panetta dismissed the notion that cryptocurrencies typically “self-destruct.”

Activities involving wagering.

Based on the pronouncements of the Chinese central bank’s leadership, while unbacked digital currencies lack any societal or economic utility, these assets are seldom employed for transactions, nor do they fuel spending or capital allocation – ultimately, they resemble a form of wagering more than an economic instrument.

“As a form of investment, unbacked cryptocurrencies also lack any inherent worth. They are speculative assets. The only reason investors acquire them is to dispose of them at a higher price,” he stated. “In essence, they are gambling disguised as investment assets.”

“However, for that very reason, we cannot anticipate their disappearance. Individuals have engaged in various forms of wagering for centuries. In the digital era, unbacked cryptocurrencies are likely to persist as a tool for gambling.”

The Societal Costs of Digital Currencies
Panetta also expounded upon the social costs associated with the unregulated digital currency marketplace. He highlighted the substantial losses investors have endured in various crypto ventures.

“Uninformed investors have sustained significant losses,” he remarked. “It’s not merely the cryptocurrencies that have been decimated.”

Beyond the direct social repercussions of the unregulated digital currency market, the former Italian central banker observed that such digital assets enable criminals to evade taxation, launder illicit funds, finance terrorism, and circumvent sanctions. He asserted that digital currencies also pose considerable environmental challenges.

“That’s why we cannot permit digital currencies to remain unregulated,” he declared.

Panetta asserted that we must establish clear guidelines to shut down regulatory loopholes and prevent individuals from exploiting them. He also highlighted the necessity to directly confront the detrimental social effects of digital currencies.

He acknowledged that this endeavor won’t be straightforward, drawing a parallel to Odysseus’s arduous voyage. He implored regulators to resist the allure of crypto and avoid succumbing to industry pressure. He cautioned against legitimizing risky crypto models, comparing them to perilous obstacles like Scylla and Charybdis.

Panetta praised existing regulations like the EU’s Markets in Crypto-Assets Regulation, but emphasized the need for further measures to ensure the entire industry is regulated, encompassing decentralized finance activities like crypto lending and non-custodial wallets. He proposed a framework akin to online gambling regulations.

He contended that regulations should recognize the speculative nature of cryptocurrencies and treat them as gambling activities. He proposed safeguarding vulnerable consumers using principles similar to those recommended by the European Commission for online gambling. He also suggested imposing taxes on cryptocurrencies based on the societal costs they impose.