On 9 July 2024, Fabio Panetta, the Governor of the Bank of Italy, addressed the Italian Banking Association Annual Meeting, sharing his critical views on crypto-assets and the regulatory landscape surrounding them. Panetta provided an in-depth analysis of the risks associated with crypto-assets, distinguishing between stablecoins and unbacked crypto-assets and highlighting the implications of the European Union’s Markets in Crypto Assets Regulation (MiCAR). Here’s a detailed breakdown of his speech, with attribution to Panetta in every sentence.
Panetta began by emphasizing the diverse nature of crypto-assets, categorizing them into stablecoins and unbacked crypto-assets. According to Panetta, stablecoins like Tether and USD Coin are digital instruments whose value is linked to a portfolio of reserve assets such as currencies, deposits, and securities. Panetta warned that without robust regulation, stablecoins are particularly susceptible to ‘redemption runs’ if their holders lose confidence in them.
Panetta then shifted his focus to unbacked crypto-assets, exemplified by Bitcoin and Ethereum, which he claimed are not issued by any specific entity and lack intrinsic value. Panetta highlighted that these assets do not generate income flows like coupons or dividends and are created using computing technology. Panetta stressed that the value of unbacked crypto-assets cannot be guaranteed by any party or backed by any real or financial asset, making them highly volatile and risky.
Panetta pointed out that unbacked crypto-assets are often traded on informal and opaque platforms lacking adequate controls. He expressed concern that these assets are held by operators primarily aiming to sell them at higher prices and, in some cases, to evade tax regulations and anti-money laundering laws. Panetta likened these assets to speculative, high-risk contracts akin to gambling, whose values are not tied to any economic fundamentals, leading to sharp value fluctuations.
Panetta acknowledged that the proportion of unbacked crypto-assets held by potentially unaware investors is currently low but could increase, as observed during the pandemic, especially in emerging markets. To address these risks, Panetta highlighted the European Union’s adoption of MiCAR, a regulatory framework set to be fully implemented within the year. Panetta noted that under this framework, Banca d’Italia and Consob will be tasked with supervisory roles to ensure compliance with the new regulations.
Panetta elaborated that MiCAR categorizes digital tokens into electronic money tokens (EMTs), asset-referenced tokens (ARTs), and a residual category that includes unsecured crypto-assets and utility tokens. According to Panetta, EMTs and ARTs, being pegged to underlying assets, are considered stablecoins, while unbacked crypto-assets fall into the latter category. Panetta stated that MiCAR imposes specific requirements and obligations on EMTs and ARTs but only prior notification obligations on unbacked crypto-assets and utility tokens, thus limiting their regulatory scope.
Panetta praised MiCAR for bringing some order to the crypto-asset market but noted that its effectiveness could be hampered by the complexity and evolving nature of the issues. Panetta warned that managing stablecoins on unreliable trading platforms, especially outside Europe, could pose risks beyond individual issuers’ control. Panetta emphasized the increased responsibilities on financial intermediaries under MiCAR, urging them to pay due attention to both financial and operational risks.
Panetta underscored the need for financial intermediaries to ensure the robustness of the technology used and to combat illicit transactions. He highlighted the importance of compliance with anti-money laundering and counter-terrorist financing regulations and international sanctions, urging organizations to align their structures accordingly. Panetta called for crypto-asset operators to bring in skilled personnel and establish effective control functions from the planning stage of new initiatives.
Panetta concluded by asserting that only EMTs possess the characteristics to fully function as a means of payment and maintain public trust, as they are pegged to legal tender currencies and protected by rules guaranteeing redemption at par value. Panetta cautioned against the use of ARTs as a means of exchange without thorough consideration of their associated risks. He announced that Banca d’Italia would soon publish a communication to facilitate effective MiCAR application, aiming to preserve market functionality and protect holders of these instruments.
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