Cryptocurrencies are only growing due to greed and are not much more than digital Ponzi schemes, according to a European Central Bank (ECB) policymaker and the chief executive of crypto exchange.
ECB board member Fabio Panetta told an audience at Columbia University that the crypto industry needed stronger oversight, comparing it to the Californian gold rush.
“Fast-forward a century and a half and, amid the global financial crisis, growing distrust of banks, coupled with technological innovation, gave rise to a new dream – a digital gold rush beyond state control,” said Panetta.
“Crypto-assets are bringing about instability and insecurity – the exact opposite of what they promised. They are creating a new Wild West.”
Panetta’s remarks follows Sam Bankman-Fried, chief executive of crypto exchange FTX, comparison of cryprtocurrencies to Ponzi schemes.
Crypto investors put money in a box, causing other people to follow suit, he said on a Bloomberg podcast.
In 2021, around 16% of Americans and 10% of Europeans invested in crypto-assets.
Panetta said it is concerning to see the strong appeal of crypto-assets, especially unbacked ones, given the lack of fundamentals, recent scandals, their use for illegal activities, and their volatility, all suggesting unsound market dynamics.
Noting a digital finance ecosystem has emerged, Panetta said crypto evangelists promise heaven on earth, and maintain the momentum of the crypto bubble with illusory narratives of constantly rising crypto prices.
With a value of USD$1.3 trl, the crypto market now exceeds what the sub-prime mortgage market was when it caused the global financial crisis, and exhibits striking similarities, said the ECB official.
Crypto-assets are causing speculation in the absence of adequate controls by promising fast and high returns and exploiting regulatory loopholes that leave investors vulnerable, he added.
Regulators must act before the bubble bursts, “to ensure crypto-assets are used within clear, regulated boundaries.”
Policymakers also need to adapt their money to the digital age by creating sovereign money appropriate for the digital age, he said in a reference to digital currency projects being undertaken by many central banks.”
Cryptocurrency prices are so high that consumers are worried about missing out, Panetta said.
“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,” added Panetta.
The market cap throughout the crypto industry was US$1.8trl, according to Coinmarketcap. Bitcoin BTCUSD was trading below US$40,000.
Read More: Crypto ‘driven by greed’ and ‘similar to Ponzi scheme’, according to financial figures