Cryptocurrencies are a global phenomenon, so coordinated efforts are needed to regulate them. This was stated by stated by Fabio Panetta, a member of the Executive Board of the ECB.
Speaking at Columbia University, he noted that a potential collapse of the crypto industry poses a serious risk to financial stability.
According to Panetta, the market capitalization of digital currencies is about 1% of the global value of financial assets. The metric has already surpassed the size of the U.S. subprime mortgage market when it stood at $1.3 trillion and spurred a global crisis.
The ECB representative noted that both markets display a “remarkably similar dynamic”.
For this reason, regulators must respond, as cryptocurrencies, by their nature, “are not backed or governed by a trusted operator,” he says.
“This makes them inherently speculative by nature and, therefore, highly unstable,” the financier stressed.
He highlighted three broad directions in which cryptocurrencies create risks to financial stability:
- A crash in the crypto market could spread to participants in the broader financial system through direct ownership of assets or service providers;
- A possible collapse of crypto currencies could erode investors’ wealth and trigger a domino effect;
- A loss of belief in the value of crypto assets could lead to a sharp drop in investor confidence in the financial market.
“Connections along these three channels are still limited. But they could strengthen quickly if cryptocurrencies were widely adopted by institutional or retail investors,” Panetta added.
Therefore, policymakers should not allow the unchecked spread of digital assets and the risks associated with them, he argues.
“Regulatory approaches vary across countries. Some have imposed a full ban, while others have restricted use. This situation is clearly unsatisfactory,” Panetta said.
In his view, global efforts to craft rules are necessary. The financier noted four broad objectives in this direction:
- Cryptocurrencies must be brought to the same standards that apply to the entire financial system, including the FATF rules, KYC procedures, and AML/FT (norms should also apply to peer-to-peer transactions);
- There is a need to implement adequate, cross-jurisdictional, coordinated taxation;
- It is necessary to tighten disclosure rules, including regulatory reporting;
- It is necessary to introduce strict transparency requirements and establish standards of conduct for service providers to protect retail investors.
“We will have to navigate difficult trade-offs, balancing the aims of promoting innovation, preserving financial stability, and ensuring consumer protection. We must achieve faster progress if we want to ensure that crypto assets do not provoke an unlawful frenzy of risk-taking,” Panetta said.
In January, Indian Prime Minister Narendra Modi urged countries toward developing a unified approach in creating a regulatory framework for the crypto industry.