The Bank of England has called for new regulations around cryptocurrencies as a “matter of urgency”, warning of the risks posed by the digital asset to retail investors.
Speaking at Sibos yesterday (October 13), the central bank’s deputy governor for financial stability, Jon Cunliffe, said: “There are well founded concerns around unbacked cryptoassets in relation to investor protection, market integrity and financial crime.
“Investors losing money on speculative investments does not, in and of itself, constitute a financial stability problem, though it may well be a major concern for authorities responsible for investor protection.”
Cunliffe acknowledged work already begun by regulators, such as the UK’s cross-regulator Cryptoassets Taskforce, but warned: “It needs to be pursued as a matter of urgency.”
The central bank executive also said, given the unbacked and volatile nature of cryptocurrencies, the implications of a major price correction posed a “more direct” threat to financial stability.
“Such major corrections have been relatively frequent in the short lifespan of unbacked cryptoassets,” he explained.
“The price of bitcoin has fallen by over 10 per cent in a single day on nearly 30 occasions in the past five years.”
Cunliffe argued “a necessary thought experiment” would be testing a massive collapse in the price of unbacked cryptoassets. “At the extreme end, if the price fell to zero.”
He continued: “Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the probability of contagion between cryptoassets, the cyber and operational vulnerabilities, and of course, the power of herd behaviour.”
Whilst the banking executive said a severe price correction would not cause financial stability problems now, he concluded: “The current trajectory implies that this may not be the case for very long.”
In his concluding statements, Cunliffe weighed up the “novel”, “great” opportunities presented by crypto against its rapidly growing prices.
In one breath, the Bank of England deputy governor acknowledged: “Bringing the crypto world effectively within the regulatory perimeter will help ensure that the potentially very large benefits of the application of this technology to finance can flourish in a sustainable way.”
But in another, he concluded: “One cannot help observing that in the two years it has taken to develop the draft CPMI-IOSCO guidance, stablecoins have grown sixteen-fold, although admittedly only to a relatively small amount.”
In response to Cunliffe's speech, Susannah Streeter, a senior investment and markets analyst at Hargreaves Lansdown, said: "Regulators and central banks are walking a tricky tightrope, recognising the need to foster new decentralised payments technology but ensuring enough rules are in place to prevent runaway speculation infecting the wider financial sector."
Streeter drew parallels with the Financial Conduct Authority's approach to the digital asset. "The FCA is extremely worried about the collision between social media and the crypto world, with Kim Kardashian’s single post about a token earlier this year considered to be the biggest financial promotion in history."