Policymakers should be wary of supporting an industry that has so far produced no societal benefits and is increasingly trying to integrate into the traditional financial system, both to acquire legitimacy as part of that system and to piggyback on it. Instead, regulators should subject cryptos to rigorous regulatory standards, address their social cost, and treat unsound crypto models for what they truly are: a form of gambling. This may prompt the ecosystem to make more effort to provide genuine value in the field of digital finance. Shifting narratives: from decentralised payments to centralised gambling The core promise of cryptos is to replace trust with technology, contending that the concept “code is law” will allow a self-policing system to emerge, free of human judgement and error. This would in turn make it possible for money and finance to operate without trusted intermediaries. However, this narrative often obfuscates reality. Unbacked cryptos have made no inroads into the conventional role of money. And they have progressively moved away from their original goal of decentralisation to increasingly rely on centralised solutions and market structures. They have become speculative assets[8], as well as a means of circumventing capital controls, sanctions or financial regulation. Blockchain limitations A key reason why cryptos have failed to make good on their claim to perform the role of money is technical. Indeed, the use of blockchain – particularly in the form of public, permissionless blockchain – for transacting crypto-assets has exhibited significant limitations.

[31] The crypto industry is seeking to grow by parasitising the financial system: it touts itself as an alternative to the financial sector, yet it seeks shelter within that very sector to address its inherent risks, all in the absence of adequate regulatory safeguards. The public response: backing, regulating or innovating? The public sector response can be encapsulated in three main suggestions. Not giving in to the temptation to offer public backing to cryptos First, the temptation to offer public backing to cryptos must be resisted. The idea of permitting stablecoin issuers as non-bank financial institutions to hold their reserves at central banks might seem appealing, but could lead to serious adverse consequences. By granting stablecoins access to the central bank’s balance sheet, we would effectively outsource the provision of central bank money. If the stablecoin issuer were able to invest its reserve assets[32] in the form of risk-free deposits at the central bank, this would eliminate the investment risks that ultimately fall on the shoulders of stablecoin holders. And the stablecoin issuer could offer the stablecoin holders a means of payment that would be a close substitute for central bank money. [33] This would compromise monetary sovereignty, financial stability and the smooth operation of the payment system. For example, a stablecoin could displace sovereign money by using the large customer network of a big tech, with far-reaching implications. [34] Therefore, central banks should exercise prudence and retain control over their balance sheet and the money supply.