Unbacked Cryptocurrencies: Ponzi Schemes or Legit Investments? Central Bank’s Dilemma

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Unbacked cryptocurrencies have recently been likened to a “Ponzi scheme” rather than a genuine investment by Central Bank of Ireland Governor Gabriel Makhlouf. While he acknowledges that cryptocurrencies are here to stay, his skepticism highlights the potential dangers inherent in poorly-backed crypto.

The Central Bank differentiates between ‘backed’ and ‘unbacked’ crypto. It is open towards the potential of ‘backed crypto’ such as Electronic Money Tokens (EMTs) and Asset Reference Tokens (ARTs) under the Markets in Crypto Assets Regulation (MiCA). However, unbacked and poorly-backed crypto are viewed with skepticism, likening the process of buying them to purchasing a lottery ticket – a long shot. This skepticism extends to the aggressive marketing efforts by influencers who do not disclose they’re being paid to promote these cryptocurrencies.

Makhlouf emphasizes that the issues that contributed to the “crypto winter” in 2022 should not be forgotten. Problems included market crashes, the fall of certain cryptocurrencies, contagions, lack of consumer and investor protection, misleading advertising, and insufficient quality of reserves. These events prompted regulators, policymakers, and central banks to focus on discussing cryptocurrencies and their role in the financial system.

The recent approval of MiCA by the European Parliament marks an important step in the regulation of cryptocurrency activities. The regulatory framework, set to be implemented in the EU by 2025, covers a wide range of issues within the crypto sector and affects various entities operating within the EU market.

Despite concerns, central banks are seeking to utilize technological innovations made possible by blockchain tech. The Bank of International Settlements (BIS) Innovation Hub Eurosystem Centre is one example, where projects focus on the compliant use of decentralized finance (DeFi) tools, blockchain, and smart contracts.

The Central Bank of Ireland also places emphasis on technological innovation, recognizing that significant technological transformation is currently underway. With these changes come risks and benefits, but Makhlouf acknowledges that “crypto is not going away very soon.” International coordination is needed to ensure regulation and supervision at a level commensurate to the risk posed by cryptocurrency markets.

In conclusion, Makhlouf suggests that crypto markets should be treated similarly to other financial markets, with comparable regulations regarding client funds treatment, disclosures, governance, risk management, and information exchange. This balanced approach acknowledges the potential of cryptocurrencies while safeguarding consumers and investors against unwarranted risks.

Source: Cryptonews

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