ECB Panetta on Payments and Digital Assets

The European Central Bank (ECB) point man on crypto regulation believes that real-time payments are needed to curb the advance of digital assets into the payments sphere.

In an April 25 speech at Columbia University, ECB board member Fabio Panetta delivered one of his harshest critiques of digital assets yet, calling “Ponzi scheme” cryptocurrencies that “derive their value primarily from greed” and could “ignite an anarchic frenzy”. of risk taking. »

While calling the recently agreed Crypto Assets Market Regulation (MICA) proposal insufficient, Panetta not only called for faster and more coordinated action globally – he called on central banks around the world to provide better alternatives, including accelerating the creation of true on-time payment networks.

See also: Real-time payments are coming – but do we need crypto to deliver it?

In a speech titled “For a Few More Cryptos: The Wild West of Crypto Finance‘, referencing both US Securities and Exchange Commission (SEC) Chairman Gary Gensler’s criticism of cryptocurrencies as the “Wild West of finance” and the classic spaghetti western movies of Clint Eastwood and Sergio Leone, Panetta said that “the global financial crisis, growing distrust of banks, coupled with technological innovation, has given birth to a new dream – a digital gold rush beyond the state control.

Regulation alone is not enough to manage this, he added.

“Central banks must commit even more to digital innovation by modernizing wholesale financial infrastructure, operating fast retail payment systems and preparing for the issuance of central bank digital currencies,” said Panetta. “The growth of crypto-asset markets reveals society’s growing demand for digital assets and instant payments. If the formal sector—government and intermediaries—does not meet this demand, others will step in.

Digital dollar vs real-time payments

Central bank digital currencies (CBDCs), such as a digital euro or digital dollar, have also been widely touted as a way to fight against cryptocurrencies, including stablecoins. This was certainly the goal of the soon to be launched eCNY, or digital yuan, in China.

Related: China’s Blanket Crypto Ban Paves the Way for CBDCs

But it’s widely believed that CBDCs aren’t coming quickly, at least to the biggest markets like the European Union and the United States, where they’ll take years to develop even after the decision is made to deploy them. to throw.

Regarding a digital dollar, Treasury Undersecretary for Home Finance Nellie Liang said in a March speech that a Federal Reserve-issued CBDC would offer the same benefits as stablecoins – low-cost transactions and in real time – without any of the financial risks and regulatory requirements. .

Read more: Treasury Undersecretary Adds FedNow to Stablecoin vs Digital Dollar Debate

And even then, she added, those same benefits can be had from the Fed’s real-time payments service FedNow.

“Because FedNow relies on the banking system, there are already safeguards for consumers and businesses,” Liang said. “Bank money generally has deposit insurance and banks are generally eligible for access to the lender of last resort. Both of these safety nets help to ensure that bank money is not usable. »

In addition, there are already real-time private payment options for FedNow, such as The Clearing House’s RTP network, which are already operational.

See also: Payments officials say the Fed has yet to present a compelling case for the CBDC

“Much of what drives this [digital dollar] the conversation really isn’t based on the merits of what the market technically needs,” Russ Waterhouse, executive vice president of product development at The Clearing House, told Karen Webster of PYMNTS recently. “It’s driven more by political perceptions.”

Related: Bitcoin’s 10-Minute Block Time Lots and Fluctuating Transaction Fees Give RTP an Edge

An unstable option

Regarding dollar-pegged stablecoins, Panetta argued that even when they are well-regulated – and they are not yet – they “can be low-risk but not risk-free and cannot guarantee the redeemability at par at any time”, as they lack deposit insurance and access to central bank standing facilities.

Read more: The battle of stablecoins against CBDCs is really two smaller wars that are also fighting each other

They are also vulnerable to runs, Panetta said, arguing that stablecoins are essentially “speculative assets” with high financial and operational risks – which was evidenced by the $76 million stablecoin hack last month. last week that caused its dollar peg to collapse, falling as low as $0.12 within a few hours.

Stating that research shows that a third of such projects have failed, he added: “When properly regulated and supervised, stablecoins are nothing more than e-money deals,” which have been around for many years. years.

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