Unbacked Crypto likened to 'ponzi scheme' by Central Bank Governor as market climbs from post-crash low 

As inflation trends steadily lower, crypto markets have grown in popularity among individual investors, many of whom have been price out of traditional assets

Governor of the Central Bank of Ireland Gabriel Makhlouf at Cork's Metropole Hotel. Photo: Darragh Kane

As Bitcoin and wider crypto markets push higher following a challenging winter, Central Bank of Ireland Governor, Gabriel Makhlouf has warned that lessons learned should not be forgotten, with last year showcasing the "many failures," of the crypto world.

Taking specific aim at unbacked assets, the Central Bank Governor likened the purchases of products like Bitcoin, Ethereum and other leading unsupported currencies to buying a lottery ticket - "You might win but you probably won’t." 

"Describing it as “investment” is, needless to say, an abuse of the word; “Ponzi schemes” might be more accurate," Mr Makhlouf continued.

Renewed warnings follow a rebound in leading cryptocurrencies following the market crash in the summer of last year. Rising interest rates targeting inflation and the collapse of one of the world's largest crypto exchanges, FTX pushed many investors out of the market, disproving the notion that these assets were immune to cyclical trends.

As inflation trends steadily lower, the Central Bank has extended several warnings in recent months in response to crypto's growing popularity amongst individual investors - many of whom have been priced out of more traditional assets - calling out key risks such as misleading marketing, contagion, inefficient reserves and an absence of consumer protection.

Additionally, Mr Makhlouf also noted the rise in "aggressive advertising," from social media influencers paid to promote crypto without disclosing their own financial incentives.

It follows a number of high-profile celebrities and social media stars being charged earlier this year by US regulators including actress, Lindsay Lohan, YouTuber and boxer, Jake Paul, and singer, Ne-Yo for participating in an illegal crypto scheme after advertising digital assets without disclosing their own compensation for doing so. 

As the pace and risks of crypto grow following last year's crash, the role of social media personalities has been largely attributed to the market's rebound, with recent volatility across the global banking sector including the failures of Silicon Valley Bank, Signature Bank, First Republic and Credit Suisse also pushing investors into alternative markets.

While it may have attracted heightened interest, the Central Bank has repeatedly warned of the lack of regulation throughout the sector, with Mr Makhlouf saying "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."

The Governor's comments follow approval from the European Parliament last month of the Markets in Crypto Assets Regulation (MiCA), which, according to Mr Makhlouf, "will put in place prudential and consumer requirements for the crypto sector across the EU."

While it will not be implemented until the start of 2025, the Central Bank governor welcomed the move, calling it "an important step in the regulation of crypto activities."