Crypto and how we can protect the consumer

05 May 2023 Blog

Governor Blog

As we approach the summer, the lessons learned from the crypto winter shouldn’t be forgotten. The events of the past year, where we saw many failures in the crypto world has ensured that central banks, regulators and policymakers are all discussing crypto and the role it is currently playing in the financial system.

Last month, I attended the opening ceremony of the Bank of International Settlements (BIS) Innovation Hub Eurosystem Centre. Projects within the Innovation Hub seek to deliver solutions around instant payments, combat money laundering, and explore the compliant use of decentralised finance (DeFi) tools including blockchain and smart contracts to improve access to finance for small and medium enterprises. I see this as a real step forward as the central banking eco-system seeks to make the most of the opportunities that technological innovation presents so that we can better deliver on our mandate.

While there, it was impossible to avoid the topic of crypto. I was delighted to participate on a panel discussion with Pablo Hernandez de Cos (the Governor of the Banco de España) and Cecilia Skingsley (Head of the BIS Innovation Hub) on this very topic and I was keen to discuss the Central Bank’s position on the monitoring and regulation of crypto, decentralised finance, and the scope for leveraging its potential.

The crypto ecosystem

As we know, crypto is a type of private sector digital tool that depends primarily on cryptography and distributed ledger technology (or similar), and has been designed to function as a medium of exchange without being issued by a central bank.  The broader crypto ecosystem comprises different types of crypto and the networks with which they interact. Over recent years we have seen the ecosystem grow rapidly, reaching parts of society and the economy at a pace and scale not seen by any other tech innovation (although AI looks as if it’s about to take over that mantle).

In the case of crypto, this market is developing at pace and the risks to consumers and investors are rising, particularly as these products remain unregulated. While the market itself – including so-called “influencers” – often speaks to the potential opportunities around crypto, regulators around the world have long been talking about the risks consumers face as they interact with the sector.

At the Central Bank of Ireland, we have a strong focus on technological innovation, recognising that we are in a moment of significant technological transformation. In Ireland specifically, technological innovation is a key feature of the financial services environment and we see that the range and nature of financial services, and the manner in which they are provided to consumers and users, is changing rapidly.  Like most change, it comes with both benefits and risks, and we in the Central Bank are focused on mitigating the latter.

2022 – The crypto winter

The crypto sector has always exhibited extreme volatility but 2022 was particularly notable, not least because of the macroeconomic environment. The period of low interest rates had created an imbalance between capital seeking higher returns and a small number of products and services within the crypto eco-system which promised to deliver them. This contributed to a boom in the crypto market which, unsurprisingly, did not last.  As interest rates rose, we saw a drop in crypto prices, putting pressure on the (very interconnected) eco system.  TerraUSD, a large “stablecoin” proved to be unstable and was the first to fail, causing contagion in crypto markets.  And in November, crypto markets declined further when FTX declared bankruptcy.

Throughout 2022, we saw key risks manifesting such as an absence of consumer/investor protection, aggressive and misleading advertising, contagion risk, inappropriate use of client assets and insufficient quality of reserves among some crypto.  The lack of regulation is a significant gap.  Firms operate without regulatory oversight and it is clear that some of them chose to operate with little thought for consumers or investors. What began as the crypto winter in 2022 still reverberates.

How should we address the crypto risk

It is clear there is urgent need for policy action.  At a European level, we share the perspective that a regulatory regime that appropriately protects consumers and investors, preserves market integrity against fraud, manipulation and money laundering, and also safeguards financial stability, is an important next step.  As regulators, we must ensure that there is a level playing field across the EU and that consumers are protected.

Two weeks ago, the European Parliament approved the Markets in Crypto Assets Regulation (MiCA).  It will put in place prudential and consumer requirements for the crypto sector across the EU. I welcome this move.   Although not due to be fully implemented in the EU until the start of 2025 – it’s an important step in the regulation of crypto activities.

However, the Central Bank remain cautious on the benefits and risks of crypto, notwithstanding that Ireland’s exposure to the sector is currently low. From our perspective, we differentiate between ‘backed crypto’ and ‘unbacked crypto’.  We are open towards the potential of ‘backed crypto’ – such as Electronic Money Tokens (EMTs) and Asset Reference Tokens (ARTs) under MiCA – where appropriate reserves and controls are in place.  But consumers should know these are not risk free.

On the other hand, ‘unbacked crypto’ (including poorly or unreliably-backed crypto) is a very different proposition.  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.  The Central Bank remains concerned at the potential for consumer harm and, in particular, discourages the marketing of crypto to the public.  (A particular concern of mine remains the aggressive advertising – which is sometimes false or misleading – through the use of “influencers” to promote crypto while not disclosing the fact they are being paid.)

The reality of course is that crypto is not going away very soon and the nature of the product means international co-ordination is needed to ensure it is regulated and supervised at a level commensurate to the risk it poses.  The crypto market should be treated no differently to other financial markets with similar rules on the treatment of client funds, and on disclosures, governance, risk management and information exchange.  The vulnerabilities need to be managed in a timely way and we will work with colleagues across the EU and at global fora such as the Financial Stability Board to ensure a rigorous regime that promotes a level playing field and avoids regulatory arbitrage in the interests of the community at large.


Regulators have an important role to play to ensure that technological innovation works to the benefit of society and consumers.  We need to identify and mitigate risks to consumers, investors, and the wider financial system.  That is at the heart of the Central Bank of Ireland’s mission and we will deliver on it in collaboration with our partners and stakeholders, while looking at how we can innovate and use new technology ourselves!

Gabriel Makhlouf

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