(Bloomberg) -- Unbacked cryptocurrencies are more akin to a “Ponzi scheme” than an investment and pose risks from which consumers and investors need to be protected, according to Central Bank of Ireland Governor Gabriel Makhlouf.

There’s an “urgent need for policy action” that protects investors and consumers across the European Union through “rigorous” regulation, he said in a blog post May 5, welcoming new EU rules that aim to start doing that.  

The remarks add to criticism of the crypto market from central banks around the globe, with the US Federal Reserve, Bank of England and European Central Bank all voicing concerns about risks from digital currency trading seeping into the broader financial system. BOE Deputy Governor Jon Cunliffe has noted that crypto is now as valuable as the subprime mortgage market was when it triggered the global financial crisis more than a decade ago.

European lawmakers approved ambitious legislation just last month that will give the European Union rules to govern the crypto industry. The green light for the EU’s Markets in Cryptoassets, or MiCA, regulation is the first time that governments have tried to supervise the upstart industry on such a scale and follows the collapse of several big players including crypto exchange FTX.

“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,” Makhlouf wrote. “As regulators, we must ensure that there is a level playing field across the EU and that consumers are protected.”

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‘Lottery Ticket’

Makhlouf added the Irish central bank distinguishes between “backed” and “unbacked” crypto, saying it’s open to the potential of “backed” crypto, such as Electronic Money Tokens (EMTs) or Asset Reference Tokens (ARTs), where appropriate reserves and controls are in place. But he said “unbacked” crypto should be treated with skepticism. 

A paper posted on the International Monetary Fund website last year described unbacked crypto assets as “the oldest and most popular type,” relying not on any backing asset for value but instead on supply and demand. It said they are mostly used for speculation, while Makhlouf, a long-time crypto skeptic, said such products can be similar to a lottery ticket.

Key risks that were evident last year included an absence of consumer or investor protection and aggressive or misleading advertising, he said. 

--With assistance from Reed Landberg.

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