The European Central Bank’s (ECB’s) point man on crypto regulation thinks real-time payments are necessary to blunt the advance of digital assets into the payments sphere.
In an April 25 speech at Columbia University, ECB executive board member Fabio Panetta unleashed one of his harshest criticisms of digital assets to date, calling cryptocurrencies a “Ponzi scheme” that “derive their value mainly from greed” and could “trigger a lawless frenzy of risk-taking.”
While calling the recently agreed-upon Market in Crypto Assets (MICA) regulatory proposal insufficient, Panetta not only called for faster and more globally coordinated action — he called for central banks around the world to offer better alternatives, among them speeding the creation of real-time payments networks.
See also: Real-Time Payments Are Coming — But Do We Need Crypto to Deliver It?
In a speech titled, “For a few cryptos more: the Wild West of crypto finance,” referencing both U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler’s criticism of cryptocurrencies as the “Wild West of finance” and Clint Eastwood and Sergio Leone’s classic spaghetti Western films, Panetta said “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.”
Regulation alone isn’t enough to handle that, he added.
“Central banks must engage even more with digital innovation by upgrading wholesale financial infrastructures, operating fast retail payment systems and preparing for the issuance of central bank digital currencies,” Panetta said. “The growth of crypto-asset markets reveals society’s growing demand for digital assets and instant payments. If the official sector — public authorities and intermediaries — does not satisfy this demand, others will step in.”
Digital Dollar vs. Real-Time Payments
Central bank digital currencies (CBDCs), like a digital euro or digital dollar, have also been widely pitched as a way to combat cryptocurrencies — most notably stablecoins. That was certainly the goal of China’s soon-to-launch eCNY, or digital yuan.
Related: China ‘Blanket’ Crypto Ban Paves Way for CBDCs
But it is widely agreed that CBDCs are not coming quickly, at least in the largest markets like the European Union and the U.S., where they will take years to develop even after the decision has been made to launch them.
As for a digital dollar, Treasury Under Secretary for Domestic Finance Nellie Liang said in a March speech that a Federal Reserve-issued CBDC would offer the same benefits as stablecoins — inexpensive, real-time transactions — without any of the financial risks and regulatory requirements.
Read more: Treasury Under Secretary Adds FedNow to Stablecoin vs Digital Dollar Debate
And even then, she added, those same benefits are obtainable from the Fed’s FedNow real-time payments service.
“Because FedNow relies on the banking system, there already are safeguards for consumers and businesses,” Liang said. “Bank-based money usually has deposit insurance and banks are generally eligible to obtain access to the lender of last resort. These two backstops help to ensure that bank money is not runnable.”
Besides which, there are already private real-time payment options to FedNow, like The Clearing House’s RTP Network, that are already up and running.
See also: Payments Execs Say Fed Has Yet to Make Compelling Case for CBDC
“A lot of what is driving this [digital dollar] conversation really is not based on the merits of what’s needed technically by the market,” Russ Waterhouse, executive vice president of product development at The Clearing House, told PYMNTS’ Karen Webster recently. “It’s driven more by political perceptions.”
Related: Bitcoin’s 10-Minute Block Time Batches and Fluctuating Transaction Fees Give RTP a Leg Up
An Unstable Option
As for dollar-pegged stablecoins, Panetta argued that even when well-regulated — and they are not, yet — they “can be low-risk but not riskless and cannot guarantee redeemability at par at any time,” as they lack deposit insurance and access to central banks’ standing facilities.
Read more: The Battle of Stablecoins vs. CBDCs Is Really Two Smaller Wars Also Fighting Each Other
They are also vulnerable to runs, Panetta said, arguing stablecoins are essentially “speculative assets” with high financial and operational risks — something highlighted by last week’s $76 million hack of stablecoin that caused its dollar peg to collapse, dropping as low as $0.12 in a few hours.
Claiming that research shows that one-third of such projects have failed, he added, “When adequately regulated and supervised, stablecoins are nothing more than e-money arrangements,” which have been around for many years.
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