ECB calls for global regulation of cryptocurrencies

Cryptocurrencies are a global phenomenon, so a coordinated effort is needed to regulate them. This was stated by a member of the ECB Board Fabio Panetta.

Speaking at Columbia University, he noted that the potential collapse of the crypto industry poses a serious risk to financial stability.

According to Panetta, the capitalization of digital currencies is about 1% of the global value of financial assets. The figure has already surpassed the size of the US subprime mortgage market, when it was worth $1.3 trillion and triggered a global crisis.

The representative of the ECB noted that both markets demonstrate “strikingly similar dynamics.”

For this reason, regulators should respond, as cryptocurrencies by their nature are “not backed or managed by a credible operator,” he believes.

“This makes them purely speculative in nature and, therefore, very unstable,” the financier emphasized.

He identified three main areas in which cryptocurrencies pose risks to financial stability:

a shock in the crypto market could spread to players in the wider financial system through direct ownership of assets or service providers;
a possible collapse of cryptocurrencies will hit the well-being of investors and can cause a domino effect;
loss of faith in the value of crypto assets can lead to a sharp decline in investor confidence in the financial market.

“Communications through these three channels are still limited. But they could quickly strengthen if cryptocurrencies are widely adopted by institutional or retail investors,” Panetta added.

Therefore, politicians should not allow the uncontrolled distribution of digital assets and the risks associated with them, he believes.

“Current approaches to regulation vary across countries. Some have imposed a complete ban, while others have limited use. This situation is clearly unsatisfactory,” said Panetta.

In his opinion, a global effort to develop rules is needed. The financier noted four broad challenges in this direction:

it is necessary to bring cryptocurrencies to the same standards that apply to the entire financial system, including the requirements of FATF rules , KYC and AML / FT procedures (the rules should also apply to peer-to-peer transactions);
it is necessary to introduce adequate, consistent taxation between jurisdictions;
it is necessary to tighten the rules of information disclosure, including regulatory reporting;
it is necessary to introduce strict requirements for transparency and establish standards of conduct for service providers to protect retail investors.

“We will have to deal with difficult trade-offs, balancing the goals of promoting innovation, maintaining financial stability and ensuring consumer protection. We must make faster progress if we are to ensure that cryptoassets do not provoke a lawless risk-taking frenzy,” Panetta concluded.

Recall that in January, Indian Prime Minister Narendra Modi called on countries to develop a unified approach in creating a regulatory framework for the crypto industry.