In a recent blog post, Gabriel Makhlouf, Governor of the Central Bank of Ireland, advocated for a rigorous regulatory approach towards the burgeoning crypto sector.
Makhlouf’s remarks come after a tumultuous year for digital assets, dubbed the “crypto winter,” that saw major market volatility and failures like the crash of stablecoin TerraUSD and the bankruptcy of crypto exchange FTX.
The Irish Central Bank governor emphasized the need for policy action to address the risks associated with the unregulated crypto market. He lauded the approval of the Markets in Crypto Assets Regulation (MiCA) by the European Parliament, which will establish prudential and consumer requirements for the crypto sector across the EU.
Makhlouf made clear the distinction between ‘backed crypto’ and ‘unbacked crypto’. While the Central Bank is open to ‘backed crypto’ like Electronic Money Tokens (EMTs) and Asset Reference Tokens (ARTs), which are subject to appropriate reserves and controls, it remains skeptical of ‘unbacked crypto’. Makhlouf equated the purchase of ‘unbacked crypto’ to buying a lottery ticket, underscoring the high risk associated with such investments:
“My view is that the claimed benefits of ‘unbacked crypto’ should be treated with a large dose of scepticism. The purchase of such products can be similar to purchasing a lottery ticket: you might win but you probably won’t. And describing it as ‘investment’ is, needless to say, an abuse of the word; ‘Ponzi schemes’ might be more accurate.“
Despite the inherent risks, Makhlouf noted the potential of decentralized finance (DeFi) tools, including blockchain and smart contracts, as a means to improve access to finance for small and medium enterprises. He highlighted the work of the Bank of International Settlements (BIS) Innovation Hub Eurosystem Centre, which is exploring the compliant use of DeFi and instant payment solutions.
Makhlouf’s cautious stance on crypto reflects broader concerns among central bankers about the rapid growth and impact of digital assets on financial stability. He acknowledged the staying power of crypto but urged for international coordination to ensure its regulation and supervision commensurate with the risks it poses.
The governor expressed concern over aggressive and often misleading advertising in the crypto sector, particularly the use of paid influencers. He advocated for similar rules across all financial markets regarding the treatment of client funds, disclosures, governance, risk management, and information exchange.
Makhlouf concluded by reinforcing the regulator’s role in ensuring technological innovation benefits society and consumers. He committed to working with stakeholders across the EU and global forums like the Financial Stability Board to establish a rigorous regime that promotes a level playing field and avoids regulatory arbitrage.
