Bank of Italy Governor Panetta Addresses the Italian Banking Association Annual Meeting, Sharing His Critical Views on Crypto-Assets and the Regulatory Landscape Surrounding Them

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.

Fabio Panetta, Governor of the Bank of Italy, delivered a speech at the Italian Banking Association Annual Meeting on 9 July 2024, discussing crypto-assets and the regulatory landscape. Panetta highlighted the diverse nature of crypto-assets, categorizing them into stablecoins and unbacked crypto-assets.

Stablecoins, such as Tether and USD Coin, are digital instruments whose value is linked to a portfolio of reserve assets like currencies, deposits, and securities. Without robust regulation, stablecoins are particularly vulnerable to ‘redemption runs’ if their holders lose confidence in them, according to Panetta.

Panetta then discussed unbacked crypto-assets, exemplified by Bitcoin and Ethereum, which he said are not issued by any specific entity and lack intrinsic value. These assets do not generate income flows like coupons or dividends and are created using computing technology. 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, according to Panetta.

Unbacked crypto-assets are often traded on informal and opaque platforms that lack adequate controls, according to Panetta, who expressed concern that these assets are largely held by operators who aim 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, similar to gambling, whose values are not tied to any economic fundamentals, leading to sharp value fluctuations.

While the proportion of unbacked crypto-assets held by potentially unaware investors is currently low, it could increase, as was seen during the pandemic, especially in emerging markets, according to Panetta. To address these risks, the European Union has adopted the Markets in Crypto Assets Regulation (MiCAR), a regulatory framework that will be fully implemented within the year.

Under MiCAR, Banca d’Italia and Consob will have supervisory roles to ensure compliance with the new regulations, according to Panetta. 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, according to Panetta. 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 at hand. Managing stablecoins on unreliable trading platforms, especially outside Europe, could pose risks beyond individual issuers’ control, according to Panetta.

Financial intermediaries have increased responsibilities under MiCAR, according to Panetta, who urged them to pay due attention to both financial and operational risks. They must ensure the robustness of the technology used and combat illicit transactions, highlighting the importance of compliance with anti-money laundering and counter-terrorist financing regulations and international sanctions, and urging organizations to align their structures accordingly.

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, according to Panetta, who concluded by cautioning against the use of ARTs as a means of exchange without thorough consideration of their associated risks.

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