ECB Steps Up Warnings About Crypto Risks

ECB Steps Up Warnings About Crypto Risks

  • Despite warnings from the European Central Bank, the cryptocurrency market in the eurozone has not stopped growing.
  • The body asks legislators around the world to urgently regulate cryptocurrencies before it is too late and the bubble bursts.
  • The ECB president said that digital currencies have no economic value.

The European Central Bank (ECB) has accentuated its campaign on the risks of investing in cryptocurrencies and other digital assets at a time when the industry is going through its worst historical crisis. These warnings were launched in the ECB’s Financial Stability Review document, which the credit institution presented this week.

The ECB’s warnings are in tune with calls from UK and US regulators, as well as the International Monetary Fund (IMF). Regulators consider that cryptocurrencies should be regulated as soon as possible, since they represent a high risk not only for users but for the global financial system.

Cryptocurrencies Are “Worth Nothing”

ECB President Christine Lagarde declared on Dutch television on Monday that Bitcoin and other cryptocurrencies are “worth nothing.” Lagarde called on lawmakers around the world to regulate digital currency trading to protect inexperienced investors.

“My very humble assessment is that it is worth nothing,” Lagarde said of cryptos. “It is based on nothing. There is no underlying asset to act as an anchor of safety,” she added.
The report of the European bank points out that “crypto-assets lack intrinsic economic value or reference assets, while their frequent use as an instrument of speculation, their high volatility and energy consumption, and their use in the financing of illicit activities make crypto-assets high-risk instruments."
The banking entity fears that in addition to raising “concerns about money laundering, market integrity and consumer protection,” cryptocurrencies may “have implications for financial stability.”

But the Market Continues to Grow…

The paradox is that the warnings from regulators and other organizations of the international financial system have not prevented the use and trade of cryptocurrencies from continuing to grow in the eurozone and throughout the world.

“Despite the risks, investor demand for crypto-assets has been increasing,” the ECB report highlights.
“This exuberance stems from, among other things, perceived opportunities for quick gains, the unique characteristics of crypto-assets (...) compared with conventional asset classes, and the benefits perceived by institutional investors with regard to portfolio diversification,” adds the document.

A recent ECB survey included in this report found that at least 10% of households in the European bloc have cryptocurrencies. Among those most enthusiastic about using crypto are educated youth, according to the study.

In the United States, the situation is similar among millennials. A study by CNBC news network published in December determined that 83% of the richest millennials in the country preferred investments in cryptocurrencies.

Regulation Is Urgent Before the Bubble Bursts

The European stability review document states that “Investors have been able to handle the €1.3 trillion fall in the market capitalisation of unbacked crypto-assets since November 2021 without any financial stability risks being incurred.”
But it warns that “at this rate, a point will be reached where unbacked crypto-assets represent a risk to financial stability. Given the speed of crypto developments and increasing risks, it is important to bring crypto assets into the regulatory perimeter and under supervision as a matter of urgency."

The intensifying criticism and warnings about investments in digital assets are not only coming from regulators. Also last week, Wall Street investor Bill Ackman compared the collapse of Terra – Luna to a “pyramid 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," Fabio Panetta, a member of the ECB's executive board, said on the subject last month.

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