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Crypto needs to be regulated to protect stability, BoE says

Crypto needs to be regulated to protect stability, BoE says
Jon Cunliffe, deputy governor for financial stability at the Bank of England (Chris Ratcliffe/Bloomberg)

Crypto needs to be regulated in order to protect financial stability, a deputy governor at the Bank of England has warned.

In a speech at Warwick Business School earlier this week (November 21), Jon Cunliffe, deputy governor for financial stability at the Bank of England, said the experience of the past year has demonstrated that crypto is not a stable ecosystem.

Part of this is because its foundation is “completely unbacked instruments of extreme volatility” that can swing wildly in value, he said.

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However, it is also in part because the crypto institutions at the centre of much of the system are unregulated, he added. 

“[They] are very prone to the risks that regulation in the conventional financial sector is designed to avoid.”

Cunliffe highlighted how the links between crypto trading and the traditional finance system are strengthening, and we “should not wait” to regulate crypto before it has the capacity to destabilise the wider financial system. 

“While the crypto world, as was demonstrated during last year’s crypto winter and last week’s FTX implosion is not at present large enough or interconnected enough with mainstream finance to threaten the stability of the financial system, its links with mainstream finance have been developing rapidly.

“We should not wait until it is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact.”

Cunliffe said retrofitting regulation on new technologies and new business models after they have reached a large scale has proven too difficult in the past.

To regulate or not to regulate

Regulators and government have not yet worked out whether they should regulate crypto, and if so, how.

Some have said the sector should not be regulated, as that would further legitimise an industry that poses no threat to financial stability and is an inherently risk investment.

Cunliffe acknowledged these views, saying some have argued that keeping crypto out of the regulatory umbrella would prevent it from being any further linked to traditional finance.

But it is too hard to predict which technologies will succeed in the long-term, he said.

“Forecasting the direction and pace of technological innovation is an even more uncertain game than economic forecasting. 

“The technologies that have been pioneered and refined in the crypto world, such as tokenisation, encryption, distribution, atomic settlement and smart contracts, not only seem unlikely to go away as our everyday lives become more ‘digital’, but may well have the potential to improve efficiency, functionality and reduce risk in the financial system.”

These areas need to be regulated in order to foster innovation, he said.

“Innovation may start in unregulated spaces. 

“But it will only be developed and adopted at scale within a framework that manages risks to existing standards.”