A representative of the European Central Bank: «cryptocurrencies threaten global financial stability»

Fabio Panetta, a member of the European Central Bank’s Executive Board, is convinced that cryptocurrencies pose a threat to global financial stability.

He compared the emergence of bitcoin and ethereum to the mortgage market boom in 2008, which eventually led to the financial crisis. Here are three factors that concern him:

1. The high volatility of cryptocurrencies and market turmoil could spread to players in the traditional financial system. Given the almost complete correlation with the S&P500, this statement is in a sense justified.
2. A drop in the value of crypto assets could affect the stability of investors. But it seems that everyone reading this material is aware of the risks, right?
3. Operational failures, fraud with digital assets, market manipulation, and hacker attacks can dramatically reduce investor confidence in cryptocurrencies. We understand it very well.

Panetta is worried about classic financial markets, again returning to historical analogies:

«The westward expansion of the United States in the second half of the nineteenth century generally coincides with a period when some states passed free banking laws that simplified the requirements for opening a bank, facilitating the emergence of so-called wild banks.

These banks were usually located in remote areas, so they were able to issue their own securities to the public, backed by questionable assets. Many of these banks defaulted, which undermined public confidence in the banking system.

We must not let this situation happen again in the digital arena with crypto assets. We need to make a coordinated effort at the global level to bring crypto assets into the regulatory sphere.

And we need to ensure that cryptocurrencies meet the standards that apply to the classical financial system.

But this is not enough. The growth of cryptoasset markets indicates a growing public demand for digital assets and instant payments. If the official sector, government agencies, and intermediaries fail to meet this demand, others will step in.

Central banks should become more involved in digital innovation by modernizing financial infrastructure, using fast retail payment systems, and preparing for the issuance of central bank digital currencies."