European central banker calls crypto ‘Ponzi scheme”
In a speech yesterday Fabio Panetta, a board member of the ECB, blasted crypto as increasing the risk of financial instability.
Crypto-assets are bringing about “instability and insecurity” and creating a new Wild West, according to Fabio Panetta, Member of the Executive Board of the European Central Bank.
In a speech at Columbia University, Panetta liked the rise of the likes of Bitcoin and Ethereum to the subprime mortgage market which led to 2008 financial crisis.
Crypto-assets, argues, pose a threat to financial stability in three ways.
"First, stress in crypto-asset markets could spill over to players in the wider financial system through direct asset holdings or ownership of service providers. One measure of such linkages is the correlation between changes in the prices of crypto-assets and of equities, which has been positive since 2020," he said.
Second, a fall in the value of crypto-assets might have an impact on the wealth of investors, with knock-on effects on the financial system, he says.
"Third, a loss of faith in the value of crypto-assets – for instance because of operational failures, fraud, price manipulation or cybercrime – could lead to a sharp deterioration in investor confidence, which could spill over to broader financial markets."
He warns regulation should seek to mitigate potential damage through much tighter regulation.
“We must not repeat the same mistakes by waiting for the bubble to burst, and only then realising how pervasive crypto risk has become in the financial system. And while some may hope to be smarter and get out in time, many will be trapped,” he said.
“Now is the time to ensure that crypto-assets are only used within clear, regulated boundaries and for purposes that add value to society. And it is time for policymakers to respond to the people’s growing demand for digital assets and a digital currency by making sovereign money fit for the digital age,” he said.
One of the other risk Panetta flags is that many invest “without understanding what they are buying.”
“Like in a Ponzi scheme, such dynamics can only continue as long as a growing number of investors believe that prices will continue to increase and that there can be fiat value unbacked by any stream of revenue or guarantee. Until the enthusiasm vanishes and the bubble bursts,” he said.
You can read the full speech here.