• Discounts and special offers
  • Subscriber-only articles and interviews
  • Breaking news and trending topics

Already a subscriber?

By signing up, you accept Moneywise's Terms of Use, Subscription Agreement, and Privacy Policy.

Not interested ?

The short version:

  • In April, a representative of the European Central Bank gave an extremely anti-crypto speech at Columbia University.
  • Using trends and statistics from neutral sources, he listed out dozens of reasons why crypto is capable of “major damage to society,” concluding that even the EU’s impending and vigorous regulatory measures wouldn’t won’t be enough to rein it in.
  • Investors should see the ECB speech as a clear sign that stiff regulations are coming — and an opportunity to reflect on the crypto market’s net impact on society.

Find a financial adviser in minutes

Are you confident in your retirement savings? Get advice on your investment portfolio from a certified professional through WiserAdvisor. It only takes 5 minutes to connect with an adviser who puts you first.

Get Started

Is the whole European Central Bank anti-crypto?

Before breaking down each of Panetta’s talking points, let’s ensure we frame his speech appropriately. Does he speak on behalf of the whole European Central Bank? Or should we interpret this more as his own personal opinion?

Well, we know that the president of the European Central Bank, Christine Lagarde, isn’t especially keen on crypto either. In various interviews she’s called it “worthless” and “based on nothing.

Lagarde’s #1 concern is for “people who assume that it’s going to be a reward, who have no understanding of the risks, who will lose it all… which is why I believe that it should be regulated.”

In the wake of the terraUSD collapse — when a supposed “stablecoin” that was algorithmically tied to the U.S. dollar plunged 97 percent, costing investors billions — the ECB released a special report highlighting the “amplified” risks posed to any individual or institutional investor with exposure to crypto.

The ECB’s report concluded that “bringing crypto-assets into the regulatory perimeter and under supervision as a matter of urgency.”

It’s safe to say, then, that Fabio Panetta wasn’t speaking out of turn when he tore into crypto at Columbia University last month.

So let’s examine what he — and by extension, the entire European Central Bank — had to say.

Key takeaways from the ECB’s anti-crypto speech

Here's the TL;DR version of Fabio Panetta's speech.

This 2 Minute Move Could Knock $500/Year off Your Car Insurance in 2024

Saving money on car insurance with BestMoney is a simple way to reduce your expenses. You’ll often get the same, or even better, insurance for less than what you’re paying right now.

There’s no reason not to at least try this free service. Check out BestMoney today, and take a turn in the right direction.

Get Started

Satoshi Nakamoto’s dream is failing (and perhaps flawed to begin with)

Within the first minute of his speech Panetta comes out swinging, referencing the very genesis of cryptocurrency itself: the 2008 Bitcoin whitepaper.

According to Panetta, Satoshi Nakamoto — or the dev(s) operating under the pseudonym — “shows a great fascination with technology, notably cryptography, but not necessarily an in-depth understanding of payment and money issues.

A frustration with the crypto creators’ lack of foresight — specifically, for how their creations would derail the sensitive status quo — becomes a common thread in Panetta’s rhetoric.

The “evangelists,” as he calls them, “promise heaven on earth” using the “illusory narrative of ever-rising crypto-asset prices”.

He continues:

“But appearances are deceptive. Satoshi Nakamoto’s dream of creating trustworthy money remains just that – a dream.”

Crypto is doing the opposite of what it promised us

Panetta asserts that while crypto promised us speed, stability, and anonymity, it’s failing on all three fronts.

He says:

“Crypto-asset transfers can take hours. Their prices fluctuate wildly. The supposedly anonymous transactions leave an immutable trail that can be traced.”

While it’s true that transfers can take hours, the average is 40 minutes for Bitcoin and Dogecoin and just five minutes for Ethereum. Most altcoins are near-instant. Many HODLers are also hoping the Lightning Network can make Bitcoin transfers instant again.

On the volatility front, though, he’s got a point. Bitcoin tumbled from $69,000 to $28,000 in just a few months, bringing most of the crypto market with it. Its daily price chart looks less “index fund” and more “EKG of a scared chihuahua.”

As for anonymity, it’s up for debate whether Nakamoto promised total anonymity in the original design. The furthest they go is to say that “The public can see that someone is sending an amount to someone else, but without information linking the transaction to anyone.

Granted, they made no mention of private entities. The IRS, for example, is widely accepted to be peeking into the blockchain to ID tax dodgers.

The team behind Ethereum, meanwhile, were careful never to give illusions of anonymity in *their* white paper.

In total, Panetta saying that crypto failed on all these fronts may be a little harsh. It’s volatile, sure, but the Lightning Network may speed things up, while pseudonymity — if not total anonymity — was delivered as promised.

What about decentralization?

It’s not even decentralized – not really

Decentralization was always a crucial part of the larger vision for crypto. In fact, the first sentence of the Nakamoto Bitcoin whitepaper reads:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”

So, what’s Coinbase, then? Panetta silently asks.

“A large majority of crypto holders rely on intermediaries, contrary to the avowed philosophy of decentralized finance.”

He pointed to El Salvador, the first country to adopt Bitcoin as legal tender, which does so only through a centralized national wallet.

So while the blockchain itself is decentralized — meaning no one party can control or manipulate it, short of a 51 percent attack — our access to the blockchain still has to be routed through intermediaries like Kraken and Coinbase (or, in the case of El Salvador, Chivo).

If the blockchain is the ocean, these exchanges own the beaches. They charge entry fees so they can hire lifeguards. That doesn’t make them greedy; just necessary, due to a blockchain design that didn’t account for public access.

Stablecoins are highly vulnerable to runs

Once he’s done highlighting crypto’s shortcomings as technology, Panetta dives into the meat and potatoes of his anti-crypto warnings.

“At present, crypto-assets are not only speculative and high-risk investments, but they also raise public policy and financial stability concerns.”

Up first? Stablecoins.

As if to foreshadow the fall of terraUSD, Panetta asserts that the $180 billion stablecoin market is highly vulnerable to a run (where too many people try to withdraw their money at once, leading to a crash).

Sure, these coins might be tethered, or pegged, to a real-world currency. However, without deposit insurance or access to central bank standing facilities, “they are stable in name only.”

It makes sense. When everyone tries to convert one currency into another all at once, it causes the first currency to collapse, bringing investors, financial institutions, and sometimes entire national economies with it.

A real-world example of this is when Russia invaded in February, Ukraine successfully prevented a bank run on the hryvnia by limiting withdrawals and freezing virtual transactions.

Two months later, Do Kwan and Terraform labs failed to do the same on TerraUSD. And as a result, the bank run accelerated the downfall of terraUSD in May: In fact, their attempts only made things worse. By selling off $3 billion worth of bitcoin and other cryptos, they only brought more of the market down with them.

To be fair, TerraUSD was always a controversial stablecoin due to the fact that it used algorithms to maintain its peg rather than actually being backed by any fiat currencies or precious metals as other stablecoins were. Still, Panetta concludes that stablecoins “cannot guarantee redeemability” and are therefore “exposed to high financial and operational risks” — a sentiment shared by the U.S. Federal Reserve.

Crypto has the hallmarks of a Ponzi scheme

Panetta doesn’t outright label crypto a giant Ponzi scheme – but he does point out some similarities.

“Rising prices are fueled by extensive news reports and investment advice on social media, highlighting past price increases and features such as artificial scarcity to create the fear of missing out.”

FOMO especially drives investors to buy crypto without fully understanding what they’re buying. I’ve long said that even the most risk tolerant investor should only ever put 10 percent of their overall portfolio into mega-risk/speculative investments like crypto.

And yet, many don’t heed that advice.

“Like in a Ponzi scheme,” says Panetta, “such dynamics can only continue as long as a growing number of investors believe that prices will continue to increase…”

But, says Panetta, an investment built on hope and FOMO can only grow “until the enthusiasm vanishes and the bubble bursts.

Not all investors buy out of FOMO — but pandemic-era FOMO capital is sure propping up the market on dangerous footing.

Crypto facilitates crime and terrorism

Here's where it gets real.

Crypto-assets are widely used for criminal and terrorist activities,” he says, estimating that bad guys moved $24 billion worth of crypto in 2021.

He got that number from The Chainalysis 2022 Crypto Crime Report which found that out of $15.8 trillion worth of transactions, 0.15 percent were sent to or from “illicit addresses,” which include scammers, known criminals, and more.

According to Chainalysis, that’s an all-time high and nearly double 2020 levels.

Panetta also points out that crypto gives rogue nations like Russia and North Korea back channels for avoiding sanctions. And any attempt to intervene would undermine the principles of decentralization, putting crypto in a tough Catch-22.

It’s a global energy hog

Finally, Panetta points out Bitcoin’s egregious power consumption in no vague terms, citing a stat from the International Monetary Fund that Bitcoin mining uses up 0.36 percent of the world’s electricity — “comparable to the energy consumption of Belgium or Chile.”

“The networks’ hunger for energy is potentially limitless,” he says.

Mining advocates would say that clean energy solutions are being implemented. But Panetta maintains that even clean energy “is energy that is not available for other purposes.

In terms of energy consumption, crypto’s saving grace may still come in the form of proof-of-stake (PoS) protocols to validate transactions. This uses much less processing power than proof of work (which helps to power older currencies like Bitcoin).

The difference is major: cryptos that use PoS consume up to 99% less energy — and many modern cryptos have either been built from the ground up to use PoS (like Cardano) or have plans to migrate to PoS as soon as possible to reduce their environmental impact (Ethereum).

But Bitcoin has no such migration plan.

Continued reading: Do eco-friendly cryptocurrencies exist?

Crypto presents a threat to financial stability

According to Panetta, crypto may only represent 1% of global financial assets, but the strength of their market has already eclipsed the one subprime mortgages had in the leadup to the Great Recession.

He says:

“Such extreme scenarios might not be just around the corner. But the longer we wait, the more exposures and vested interests build up. And the harder it will be for policymakers to act.”

Crypto, Panetta says, presents a risk to the general market via three channels:

  1. Stress in the crypto market could spill over, as evidenced by the positive correlation between crypto prices and traditional equities.
  2. A fall in crypto prices could impact investor wealth.
  3. A loss in faith in crypto could spill over to the general market, as well.

Solution: regulations and higher taxes are needed

“We need to make coordinated efforts at the global level to bring crypto-assets into the regulatory purview.”

So, what’s to be done about all this?

Panetta outlines a four-part plan to contain the crypto threat:

  • Hold crypto to the same standards as the rest of the financial system. Let the Finanical Action Task Force step in to prevent fraud, money laundering, and terrorism financing.
  • Figure out how to tax it like all other sources of capital gains.
  • Boost public disclosure and regulatory reporting to help institutions better assess risk and prevent the misleading of investors, and
  • Introduce strict transparency requirements set out by “professional operators” to protect inexperienced retail traders

Many of these initiatives are already underway.

The Organization for Economic Cooperation and Development (OECD) is introducing reporting obligations for transactions above a certain threshold, and the Regulation of Markets in Crypto-Assets (MiCA) will “harmonize the regulatory approach” across the EU.

But Panetta’s point is that these measures won’t be enough to rein in crypto. “We need to make coordinated efforts at the global level to bring crypto-assets into the regulatory purview,” he says.

That’s why the European Central Bank “is at the forefront of work in all these areas.”

The bottom line: what should investors take away?

For starters, stiff regulations are coming — even in the U.S.

Biden’s executive order may have sounded surprisingly laissez-faire, but that was before TerraUSD emptied countless American savings accounts.

Since then, The Federal Reserve’s 2022 Financial Stability Report calls for significantly more “supervision” and “oversight” to come.

Now, regulations alone may not cause prices to drop. They may even bolster them, as more retail traders feel comfortable entering the space for the first time.

What may cause prices to drop, however, is the digital euro. Anyone invested in USDC or Tether as a virtual store of value may abandon crypto in favor of a digital fiat with deposit insurance.

But market projections aside, I think every investor should reflect on the data in Panetta’s speech. Crypto has value in the global marketplace, but it can’t continue to operate completely outside the boundaries of law and order. Our regulatory bodies exist for a reason. And they may help to prevent the next stablecoin disaster or bursting bubble.

We should also be grateful that the U.S. and EU aren’t closing off the beach — they’re just adding more lifeguards.

More expert analysis:

Sponsored

Follow These Steps if you Want to Retire Early

Secure your financial future with a tailored plan to maximize investments, navigate taxes, and retire comfortably.

Zoe Financial is an online platform that can match you with a network of vetted fiduciary advisors who are evaluated based on their credentials, education, experience, and pricing. The best part? - there is no fee to find an advisor.

About the Author

Chris Butsch

Chris Butsch

Freelance Contributor

Chris helps young people prosper - both mentally and financially. In addition to publishing personal finance advice for Investor Junkie (now Moneywise) and Money Under 30, Chris speaks on the topics of positive psychology and leadership through CAMPUSPEAK and sits on the advisory board of the Blockchain Chamber of Commerce.

What to Read Next

Disclaimer

The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.