ECB board member calls for crypto be considered gambling laws
European Central Bank (ECB) board member Fabio Panetta has called for unbacked cryptocurrencies to be regulated under gambling laws, emphasizing the need for a structured approach to protect investors and maintain market integrity.
The tumultuous cryptocurrency landscape of 2022 witnessed the downfall of several high-profile platforms and coins, which resulted in significant financial losses for retail investors. Noteworthy failures included the collapse of the “stablecoin” TerraUSD in May, Bitcoin’s staggering 54% decline over the year, and the disastrous implosion of the crypto trading exchange FTX.
Panetta identified these occurrences as interlinked issues, underscoring systemic flaws within the cryptocurrency market. “These failures unfolded in rapid succession, driven by the excessively high leverage utilized by crypto entities, their interconnectedness across the cryptocurrency ecosystem, and the lack of robust governance structures,” he stated.
While he acknowledged the limited contagion effect of these crypto failures on broader financial markets, Panetta rejected the notion that the cryptocurrency sector would ultimately “self-combust.”
Reframing Cryptocurrency as Gambling
Panetta’s viewpoint aligns with that of many central bankers, who contend that unbacked crypto assets perform little to no socially or economically beneficial function. They are infrequently employed for payments and fail to stimulate consumption or investment, leading to a perception that they should be classified as vehicles for gambling rather than economic instruments.
“As investment vehicles, unbacked cryptocurrencies possess no intrinsic value,” he asserted. “They are fundamentally speculative assets, sought after solely for the purpose of reselling at inflated prices. In truth, they represent a gamble cloaked in the guise of investment.”
The enduring nature of gambling underscores Panetta’s assertion: “We cannot expect unbacked cryptocurrencies to vanish, as human behavior has always encompassed various forms of gambling. In the digital age, cryptocurrencies are likely to persist as a medium for such activities.”
Addressing the Social Costs of Unregulated Crypto
Moreover, Panetta elaborated on the social ramifications of an unregulated cryptocurrency market, highlighting the profound losses incurred by investors in diverse crypto ventures. “Uninformed investors have suffered considerable financial damage,” he noted, adding, “The fallout extends beyond cryptocurrencies themselves.”
Beyond immediate financial hardships, the former Bank of Italy official raised concerns about how unregulated digital assets enable illicit activities, including tax evasion, money laundering, terrorism financing, and sanctions circumvention. He pointed out the significant environmental challenges posed by the energy consumption of crypto networks.
“This is precisely why we cannot afford to leave cryptocurrencies unregulated,” he emphasized. “We must establish regulatory frameworks that bridge existing gaps, counteract arbitrage, and directly address the substantial social costs associated with these digital assets.”
According to Panetta, implementing these changes will not be straightforward. “Much like Ulysses had to navigate between the sirens and Scylla and Charybdis, regulators must resist the alluring but misguided lobbying efforts from within the crypto industry. At the same time, they must avoid falling into the trap of lax regulation or endorsing flawed crypto models.”
The Call for Improved Regulatory Framework
In his remarks, Panetta commended current regulations such as the EU’s Regulation on Markets in Crypto-Assets, but he asserted that substantial work remains to ensure comprehensive industry oversight. This includes the regulation of decentralized finance (DeFi) activities, such as crypto asset lending and non-custodial wallets.
“Regulatory measures should recognize the speculative tendencies of unbacked cryptocurrencies and categorize them as gambling activities,” he recommended. “Vulnerable consumers must be shielded through protective principles akin to those proposed by the European Commission for online gambling, and taxation should reflect the societal costs incurred by these assets.”
