Bank of England deputy governor warns of plausible crypto crash if not regulated

• The collapse of cryptocurrencies is a plausible possibility, and regulations to govern the fast-growing sector are needed immediately, according to Jon Cunliffe, Deputy Governor Jon Cunliffe
• As major investors, hedge funds, and banks get increasingly active, connections between cryptocurrencies and the regular financial system are also developing, according to Cunliffe
• Successfully integrating the crypto world within the regulatory perimeter would help ensure a very substantial advantages of this technology’s application to crypto banking can expand in a sustainable manner

The collapse of cryptocurrencies is a possibility, and regulations to govern the fast-growing sector are needed immediately, according to Bank of England Deputy Governor Jon Cunliffe. Cryptoassets have increased by 200 percent this year, from just under $800 billion to $2.3 trillion, according to Cunliffe, with 95 percent of them, including bitcoin, being unbacked by any asset or fiat currency.

However, as the financial crisis demonstrated, you don’t need a large proportion of the financial sector to cause financial stability problems – subprime was valued at around $1.2 trillion in 2008, Cunliffe said, referring to a segment of the US mortgage market whose collapse triggered a global banking crisis. Given the absence of intrinsic value and resulting price volatility, the risk of crypto asset contagion, the cyber and operational vulnerabilities, and, of course, the strength of herd behaviour, Cunliffe added, such a collapse is absolutely a conceivable scenario.

As major investors, hedge funds, and banks get increasingly active, connections between cryptocurrencies and the regular financial system are also developing, according to Cunliffe. Due to the lack of investor protection, unregulated, decentralised finance, or DeFi, which provides financial services such as credit using the technology that supports cryptocurrencies, poses significant problems, according to the BoE, which has begun work on how such risks might be addressed.

Last week, global authorities suggested that the safeguards in place for systemic clearing houses and payment systems be extended to stablecoins, a form of cryptocurrency backed by an asset or fiat money that accounts for barely 5 percent of all crypto assets. 

Cunliffe, who assisted in the development of the potections, said the policy took two years to design and that stablecoins had grown 16-fold over that time. In fact, Successfully integrating the crypto world within the regulatory perimeter would help ensure a very substantial advantage of this technology’s application to crypto banking can expand in a sustainable manner, he said.