Regulation cannot eliminate ‘inherently high’ risk in crypto

Every few months from the great, inscrutable world of cryptocurrencies a fresh piece of terminology hits the mainstream, promising to revolutionise the world of finance. Stablecoins are now the next big thing.

Invariably, after six months in which the new term fills newspaper columns and corporate types announce how they are embracing the “complex synergies and unlocking capabilities” of the new tech, it is forgotten with the arrival of an even newer term or concept.

The pace of innovation in the space is impressively fast, but that means regulators struggle to keep up with the inevitable knock-on consequences for investor risk.

Addressing the Blockchain Ireland conference, Gerry Cross, the director for capital markets and funds at the Central Bank, alluded to that element.

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“Risks to consumers are inherently high in some crypto and related services, and crypto markets have been noteworthy for their significant volatility,” he said.

Even with the introduction of the new EU-wide Markets in Crypto-Assets Regulation (MiCAR), Mr Cross said it “will not provide the same levels of protection as exist for traditional financial investment products, nor will it mitigate all the risks linked to crypto-assets”.

In a speech full of indications of the vast promise of decentralised and digital finance technology, this represents the stark reality of investing in cryptocurrency; it is a risky game.

The Central Bank, which has moved from labelling unbacked crypto assets as more akin to a “Ponzi scheme” than an investment to noting the potential of the latest hit topic, stablecoins, has a challenge on its hands in finding the balance between regulating the technologies and stifling innovation.

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Cross says a “good outcome” for the regulator will be that the risks involved in cryptocurrency investments are understood and that “any change occurs in a safe manner”. However, this is an industry that often trumpets the mantra of “move fast and break things”.

An increasing number of cryptocurrency and related digital finance firms are choosing to locate in Ireland.

It remains to be seen whether regulatory attempts to maintain “safe” change will keep pace with the constant development and launches of new technologies in such a “significant volatility” market.