It is difficult to see any reason for the existence of cryptocurrencies in finance. This was said by Fabio Panetta, a member of the board of the European Central Bank (ECB), during a lectio magistralis held in Italy and organized by Federcasse.
His is a wide-ranging attack that can only be understood by bearing in mind that during the same conference he also spoke about the digital euro.
Panetta, ECB: cryptocurrencies like subprime mortgages
Speaking of cryptocurrencies at the conference, Fabio Panetta stated in no uncertain terms that their value:
“Has the potential to generate risks to financial stability that should not be underestimated. For example, the amount is higher than the value of the subprime mortgages that detonated the global financial crisis of 2007-2008. Crypto assets are in effect a gamble and are traded by operators whose only interest is to sell them at a higher price”.
The digital euro, on the other hand,
“has nothing to do with cryptocurrencies such as Bitcoin”.
Always on cryptocurrencies, Panetta went on to highlight the problem of the pollution they produce and their use for criminal activities.
“What is more, they do not provide bona fide investors with any protection of an informational nature or against cyber risks. Overall, it’s hard to see any reason why crypto assets should exist in the financial landscape.”
What has not been said
Put in these terms, cryptocurrencies may well be pure evil. But there are details the ECB member didn’t say that make cryptocurrencies not too different from fiat currencies or stocks.
When it comes to cryptocurrencies being traded by speculators alone, it is undoubtedly true: crypto is a speculative tool, as are shares regularly traded on financial markets with all the derivatives that have already done enormous damage in the past, such as subprime mortgages.
But cryptocurrencies, Bitcoin in particular, are also used as a store of value. Their use cannot be relegated to a mere speculative tool.
The issue of pollution is indeed a real problem, on which many blockchains are actually working. For example, Bitcoin mining is moving towards clean energy, while Ethereum will drastically reduce consumption by switching to PoS.
As far as criminal activities are concerned, it is worth remembering that criminals can also make very good use of fiat currencies, and are perhaps even more practical.
As far as protection from security risks is concerned, cryptocurrencies can actually be more than safe: all that is required is to store them in hardware wallets and take care not to lose the access keys.
Panetta is undoubtedly right about one thing: the digital euro has nothing to do with Bitcoin. Bitcoin is a decentralized currency in the hands of the community; the digital euro will only be an electronic version of the currency issued by the European Central Bank.
The digital euro
Speaking of the digital euro, it is clear that it will become reality, even if it takes a while. Panetta said that the digital euro will be inevitable:
“It will be difficult for it not to be implemented”.
During the conference, an explanation was also given of what it will look like and when it will become reality.
According to Panetta, digital money would provide the same services as paper money, presenting itself as a secure, cost-free and user-friendly instrument.
It is an “ambitious” and “complex process”, which will serve to ensure stability and will ultimately be indispensable.
“In the absence of public intervention, the system could be hegemonized by the big global players, primarily the Big Techs, who would care much less about the stability of the financial system than the central bank. The digital euro, if appropriately designed, will therefore avoid worst-case scenarios, bringing stability to the financial system”.
The conference also discussed the timing, considering that China is one step closer to releasing its CBDC, or digital yuan. Panetta stated:
“If everything succeeds it will take five years”.
A currency already lagging behind
These words suggest that it will go beyond the four years that the President of the European Central Bank Christine Lagarde had already spoken about.
This means that Europe is lagging far behind China, which is threatening to alter the economic scenario with its digital currency.
It remains to be seen whether, once the effects of the digital yuan have been felt, the ECB and the Federal Reserve will also decide to accelerate their digital currency projects.
Panetta also talked about stablecoins, stressing that they are not stable at all, which is why he called them unstablecoins.
In his view:
“One of the most popular stablecoins promises ‘stability’ by investing in assets that are in themselves not very risky, such as commercial paper, and holds a high share of the stock of these instruments in circulation. In the presence of tensions, massive sales of assets in response to a sudden increase in redemptions could generate instability in the entire commercial paper market. This could spread to other stablecoins and related parts of the financial system, and could even reach the banks that hold stablecoin liquidity. The risks could be amplified by opacities about the composition of stablecoin assets, the lack of controls on conflicts of interest between issuers and stablecoin holders, cases of fraud or maladministration, and the link between stablecoins and crypto-assets”.
Panetta also pointed out that a third of stablecoins launched in the past have already defunct. The risks of stablecoins could be reduced if they entrusted their reserves in the form of deposits with the central bank. But that would be a contradiction, he explained:
“This would, however, limit monetary sovereignty, as one of the central bank’s fundamental tasks, the creation of money, would in fact be delegated to a private entity that would exercise it for purposes of a commercial nature and not in the public interest.”