Cryptocurrencies are a global phenomenon, so a coordinated effort is required to regulate them. This was expressed by a board member. ECB Fabio Panetta.

Speaking at Columbia University, he pointed out that the potential collapse of the crypto industry poses a serious risk to financial stability.

According to Panetta, the capitalization of digital currencies is about 1% of the global value of financial assets. The figure exceeded the size of the US subprime mortgage market, which was already valued at $1.3 trillion and triggered a global crisis.

The ECB representative noted that both markets showed “strikingly similar dynamics”.

As such, he believes regulators should respond, as cryptocurrencies are inherently “not supported or managed by a trusted operator.”

“This makes them purely speculative in nature and therefore very unstable,” the financier said.

He identified three main areas where cryptocurrencies pose a risk to financial stability:

• a shock in the crypto market could spread to players in the wider financial system through direct ownership of assets or service providers;
• a possible crypto collapse will affect the welfare of investors and may cause a domino effect;
• The loss of faith in the value of crypto assets can lead to a sharp drop in investor confidence in the financial market.

“Communication through these three channels is still limited. But if cryptocurrencies are widely adopted by institutional or retail investors, they can quickly strengthen,” Panetta added.

Therefore, he believes that politicians should not allow the uncontrolled distribution of digital assets and the risks associated with them.

“Current approaches to regulation differ between countries. Some have introduced a complete ban, while others have limited use. This situation is clearly unsatisfactory,” said Panetta.

According to him, a global effort is needed to develop rules. The financier noted four major challenges in this direction:

• It is necessary to bring cryptocurrencies to the same standards that apply to the entire financial system, including the requirements of the rules. FATFprocedures KYC and AML/FT (rules should also apply to peer-to-peer transactions);
• it is necessary to introduce adequate and consistent taxation across jurisdictions;
• information disclosure rules, including regulatory reporting, need to be tightened;
• Strict requirements for transparency need to be introduced and standards of conduct for service providers need to be established to protect retail investors.

“We will have to deal with tough trade-offs, balancing the goals of fostering innovation, maintaining financial stability and ensuring consumer protection. “We need to move forward faster if we want crypto-assets not to incite an unlawful risk-taking spree,” Panetta said.

Recall that in January, Indian Prime Minister Narendra Modi urged countries to develop a unified approach to creating a regulatory framework for the crypto industry.