© Reuters
Investing.com – In what is yet another testament to the ECB’s aversion to cryptocurrencies, European Central Bank board member Fabio Panetta gave a speech yesterday in which he methodically outlined the flaws and adverse effects on the economy of and other cryptocurrencies.
Cryptocurrencies are “the bubble of a generation” that is “doomed to burst”, and are just a “new way to play”, he explained.
To support his opinion, he notably put forward 3 arguments: The uselessness of cryptos from a social point of view, the risk represented by the illusion of security of stablecoins, and the danger of the high leverage effect used by crypto traders.
Cryptos are socially useless and environmentally harmful
Panetta therefore noted that “unbacked crypto-assets perform no socially or economically useful function”, pointing out that “they are not used for payments” because they are all “too volatile and inefficient”.
Cryptos are on the other hand “widely used for criminal and terrorist activities, or to evade taxes” according to him.
Panetta also pointed out that cryptocurrencies “can cause enormous environmental damage.”
He thus considered that “crypto assets deemed to have an excessive ecological footprint should be prohibited”, referring to cryptos such as the which use a network security mechanism by “proof of work”, very energy-intensive.
The Illusion of Security of Stablecoins
The second major flaw in cryptocurrencies noted by Panetta concerns “the alleged stability of stablecoins, on which the entire crypto ecosystem has relied”.
He explained that stablecoins “attract users because, unlike unbacked cryptocurrencies, they offer stability, their value being tied to a portfolio of assets,” distinguishing them from algorithmic stablecoins, which “aim at to match supply and demand to maintain a stable value.
Referring to the TerraUSD stablecoin crash earlier this year, however, Panetta asserted that “stablecoins are stable in name only”, pointing out that even the leading stablecoin, , has “temporarily lost its footing in the context of the tension that followed in the market,” which he said shows that “even for secured stablecoins, risks cannot be eliminated easily.”
The risk of excessive leverage offered to crypto traders
Finally, the third structural weakness of cryptos noted by Penetta “is the fact that crypto markets can have incredibly high leverage and interconnections”.
He pointed out that “cryptocurrency exchanges allow investors to increase their exposures up to 125 times the initial investment”, explaining that “when shocks occur and deleveraging is necessary, they are forced to unload of their assets, which puts strong downward pressure on prices.
Panetta also lamented the mechanics behind this leverage, with “the pervasive over-collateralization adopted in DeFi lending to offset the risks posed by anonymous borrowers.”
He indeed explained that “borrowed funds can be reused as collateral in subsequent transactions, allowing investors to accumulate significant exposures”, pointing out that “these are precisely the dynamics that we have seen at work in recent crypto defaults,” here referring to FTX’s bankruptcy.