Sam Woods, who in addition to being deputy governor is chief executive of the Prudential Regulation Authority (PRA), wrote to the heads of financial firms to warn them of their “obligations” as regulated entities, when it comes to exposure to crypto currencies, of which the best known is Bitcoin.
Bitcoin’s price has fallen from £17,000 at Christmas 2017 to £4,000 today.
Mr Woods wrote: “We acknowledge that firms may have taken limited exposure to crypto-assets to date, and hope this letter is helpful to firms in considering any existing exposures and/or plans for the future.
"We also recognise that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time.
"The range of products and market participants related to crypto-assets has grown quickly. In their short history, crypto-assets have exhibited high price volatility and relative illiquidity.
"Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks.
He added entering into activity related to crypto-assets may give also rise to "reputational risks".
"These risks are relevant to both the Financial Conduct Authority’s (FCA) and the PRA’s statutory objectives.
"I remind you of your firm’s responsibilities under the PRA’s Fundamental Rules 3, 5 and 7 to: (i) act in a prudent manner; (ii) have effective risk strategies and risk management systems; and (iii) deal with regulators in an open and co-operative way, and disclose appropriately anything relating to your firm of which we would reasonably expect notice.”
He wrote that decisions about exposure to crypto currency should only be made by the senior management at a finance firm, and that staff bonus policies should not be seen to reward the extra risk taking involved in the use of crypto currencies in portfolios.
Will Hobbs, head of investment strategy at Barclays Smart Investor said the "frenzy" surrounding crypto has ebbed and flowed with prices.
"Through the several hundred percent of ascent over 2017, to the c.70 per cent decline since Bitcoin’s 2017 peak there has been no commensurate or even perceptible change in the fundamental prospects in the crypto currency. The same applies for most of its peer group.
"We continue to argue that without a role in the global economy, the intrinsic value of many of these crypto currencies still sits a long way below their current trading levels. This role is still elusive in many cases, while the arguments behind the idea of a future ‘bitcoin standard’ are still economically illiterate.
“None of the crypto currencies currently fulfil any of the criteria that we would look for in an investible asset and we would continue to advise extreme caution. The rout in crypto currencies is still not finished.”
Nigel Green, chief executive of advice firm Chase De Vere, which has crypto currency exposure, said the recent decision by Facebook to lift a ban it had on the advertising of crypto currency will boost demand for those assets.
David.Thorpe@ft.com
