In a speech this week at Columbia University by European Central Bank (ECB) Executive Board member Fabio Panetta, he denounced the whole “crypto bet”, considering crypto-assets as “causing the instability and insecurity – the exact contrary to what they promised” and calling for stricter regulation in the EU (and coordination with international partners) to limit the financial and associated risks associated with crypto- assets.
Panetta’s speech (titled “For a Few More Cryptos: The Wild West of Crypto Finance”) referred to remarks made by SEC Chairman Gary Gensler in August 2021 that referred to crypto as the “Wild West.” and were calling on Congress to give the Commission more authority “to write rules and attach guardrails to crypto trading and lending” that would boost consumer confidence and allow the industry to thrive. Panetta’s scathing campaign was launched against what he sees as the riskier and more devious side of crypto – speculative fervor and greed, the high volatility of crypto markets, the facilitation of criminal financial activity, lack of adequate disclosures, unregulated or “insufficiently supervised cryptocurrency miners and service providers, and other unregulated or under-regulated aspects of the “crypto bubble” which, if ignored, could present financial stability risks (citing the subprime mortgage market that triggered the last global financial crisis). a high-level strategy to regulate and foster innovation in the burgeoning digital asset space and has pushed central banks to act faster to r develop central bank digital currencies (CBDCs) and “meet people’s growing demand for digital assets and digital currency by adapting sovereign currency for the digital age” or else sit idly by while the private sector satisfy this request.
From a broad perspective, Fabio Panetta’s remarks, coupled with the multiple crypto-related regulatory developments underway in the EU and the US, suggest that some changes are afoot for the crypto industry. While there has been industry-friendly legislation at the state level in recent years to encourage innovation, at the federal level it seems that the honeymoon period of light or no regulation (or largely, regulation by agency enforcement) for the crypto industry is complete. Innovation in this space continues apace as regulators slowly gain experience and expertise on public policy and the risks to investors related to crypto-assets. Thus, providers should expect more scrutiny and additional compliance hurdles in the future, as several regulators have stated that the sustainable innovations and societal benefits of cryptocurrencies and DeFi applications can only happen. with responsible regulation. Panetta said it won’t be easy to put in place such responsible oversight, as there will be “complex trade-offs, balancing the goals of promoting innovation, preserving financial stability and protecting consumers.” .
Panetta’s speech highlighted several areas where he believed cryptoassets were “speculative and high-risk investments” that could eventually become a risk to the financial system, prompting calls for more regulation:
Public policy concerns: Panetta argued that unbacked crypto assets, due to their volatility, cannot perform the basic functions of money and “in the absence of adequate controls” these assets are now largely driven by speculation, FOMO (fear of running out) and expectations of quick returns. . Panetta noted that these cryptoassets are bought by those who likely don’t understand the risks of what they’re buying and do so with little to no backstops or protections. He then commented on the detrimental environmental consequences of cryptocurrencies running on proof-of-work blockchains and the use of crypto by criminal enterprises in ransomware and other systems. Similar to ongoing discussions in Congress regarding stablecoins, Panetta also argued that stablecoins, which are digital currencies backed by fiat currency or tied to other safe assets, “can be low-risk but not risk-free.” and present their own systemic financial concerns.
Regulation of crypto-assets: Panetta said regulation should “balance risk and reward so as not to stifle innovation that could drive payment efficiency and broader applications” of blockchain technologies. He outlined four main areas of focus: (1) holding cryptoassets to the same standards as the traditional financial system, particularly in the area of anti-money laundering and sanctions compliance; (2) ensure fair taxation of crypto-assets, including a suggestion that proof-of-work-based crypto be taxed at higher rates; (3) implement enhanced reporting and transparency requirements for stablecoins; (4) adopt consumer protection measures to protect inexperienced crypto investors. According to him, the EU must act as soon as possible: “We need to move faster if we want to ensure that crypto-assets do not trigger a frenzy of anarchic risk taking”.
Panetta’s speech referenced several proposals that European lawmakers are currently working on. Indeed, EU branches of government are currently in trilogue discussions on the regulation of crypto-asset markets or “MiCA”, which is a sweeping proposal to enable and regulate digital finance (and which recently made the news about a rejected provision that would have restricted the use of cryptocurrencies that operate on proof of work). EU lawmakers are also completing negotiations on crypto-related AML regulations, as well as debate on the proposed regulation on information accompanying transfers of funds and certain crypto-assets (“FCTR”), which would require, among others, crypto-asset transfers that include at least one virtual asset service provider to be traced and suspicious transactions to be blocked.
Proposals covering crypto-assets are also spreading in the US, as evidenced by: SEC efforts to regulate the next generation of blockchain-based decentralized finance (DeFi) applications; SEC Chairman Gensler’s recent statement that the agency will consider whether and how protections afforded to other investors on exchanges with which retail investors interact should apply to crypto platforms; the publication by the Treasury Department’s Office of Foreign Assets Control (OFAC) of a sanctions compliance guide in 2021 for the virtual currency industry; a recent statement by Acting Chief of the U.S. Office of the Comptroller of the Currency (OCC), Michael Hsu, saying that standards should be developed around stablecoins, similar to the early days of the internet, to ensure that stablecoins are open and understood; the ongoing congressional debate over the regulation of stablecoins and the sweeping regulation of digital assets (e.g., HR4741); and President Biden’s Executive Order on Digital Assets which, among other things, directed the Federal Reserve and others to intensify the study of CBDCs.
So, as Panetta said, the growth of crypto asset markets “reveals society’s growing demand for digital assets and instant payments,” which is driving vendors to create innovative crypto-related products and applications. . As a result, global regulators and central banks must now take into account a host of new public policies and systemic financial issues.
Jonathan Mollod contributed to this article.
© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 119