Fabio Panetta, member of the Executive Board of the European Central Bank has recently made a speech at Columbia University, where he talked about how and why central banks around the world should make a coordinated effort to regulate crypto assets more strictly. Learn about his concerns, the prospects for crypto in the EU, and regulations in Hungary.
The risks of cryptocurrencies and crypto assets
In his speech, Fabio Panetta highlighted the risks of cryptocurrencies. His criticism centered on comparing the dynamics of the crypto scene to how Ponzi schemes work. Both are built on an ever-growing number of investors, and both are prone to creating bubbles that can burst any time. He recalled the events of 2007 and the collapse of the sub-prime mortgage market in the U.S. which triggered the most severe worldwide recession in decades, emphasizing that while the share of crypto assets worldwide remain under 1%, it is already larger than the market of sub-prime mortgages was before the meltdown.
Other criticism included:
- High volatility, making cryptocurrencies unreliable and unsuitable for storing value. For example, Bitcoin was at USD 68,000 last November, and it dropped to USD 38,000 by this April.
- Susceptibility to criminal activities, tax evasion, and circumventing sanctions. According to a 2021 study, 23% of all crypto transactions could be associated with criminal activities.
- Contribution to climate change. Mining in only the Bitcoin network uses about 0.36% of the world’s electricity, which is comparable to that of Belgium or Chile.
Crypto assets pose financial stability risks through three main channels
- Stress in crypto-asset markets could spill over to players in the wider financial system.
- A fall in the value of crypto assets might have an impact on the wealth of investors.
- A loss of faith in the value of crypto assets could lead to a sharp deterioration in investor confidence, which could spill over to broader financial markets.
Cryptocurrencies still on the rise
Mr. Panetta said that in spite of all the above, the main factors behind the continuing growth of the crypto market are
- the general public’s limited understanding of risks,
- the fear of missing out, and
- intense lobbying that drives up exposures while slow down regulation.
Call for globally coordinated regulatory action
In his speech, Mr. Panetta underlined that there is a need for prompt globally coordinated regulatory action to address the various issues related to the mining and use of cryptocurrencies, including cross-border criminal activities or the environmental footprint. While he acknowledged that there is progress both in Europe and worldwide, it is not happening fast enough to keep pace with the challenges that emerge.
The most important issues to address are listed as follows:
- Holding crypto assets to the same standards as the rest of the financial system.
- Taxing crypto assets adequately, which should include reporting obligation on transactions above certain thresholds, and introducing levies on aspects that hurt the entire society, such as pollution.
- Introducing mandatory disclosure for major players.
- Introducing strict transparency requirements and standards of conduct.
Upcoming EU regulation
In line with this, EU organizations are working hard on creating a harmonized regulatory approach for cryptocurrencies. A Regulation of Markets in Crypto-Assets is currently being finalized, while the Regulation on Information Accompanying Transfers of Funds and Certain Crypto-Assets (FCTR) aims to prevent crypto transfers from circumventing sanctions and regulations. Once EU principles are laid down, national authorities will be required to enforce them properly.
At the same time, the European Central Bank has a project that aims to introduce digital euro, which will be a digital alternative for cash, independent from individual financial providers, and accepted all over the EU. Currently one of the main benefits of cash is how it can ensure privacy for transactions – something that must be considered thoroughly before the introduction of a digital alternative, which must rely heavily on tracking transactions. In regulations concerning both crypto assets and digital euro, a balance must be struck between protecting users’ privacy and preventing abuse.
Your prospects in Hungary
Until a harmonized EU regulation is introduced, member states are free to regulate cryptocurrencies as they see fit. In Hungary, only the exchange of cryptocurrencies to traditional currencies is taxes, where you have to pay a 15% personal income tax if you are a tax resident. Moreover, investors can deduct their crypto related losses from their tax base. These two factors make dealing in cryptocurrencies in Hungary quite favorable.
If your Hungarian company deals in cryptocurrencies, it is essential to work with an accounting partner that is an expert of such transactions. This way you can rest assured that your operation remains compliant while you make the most of your earnings. Helpers Finance offers just that, with the help of a team that has more than 15 years of experience working with small and mid-size companies in Hungary.