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Bank of England (BoE) Governor Jon Cunliffe says a collapse in cryptocurrencies is a “plausible scenario” and that it requires rules to regulate the fast-growing sector as a “matter of urgency.” In a speech to the SIBOS conference on Wednesday, Cunliffe said, while risks to the financial stability from crypto are currently limited, there are a number of “very good reasons” to think this wouldn't be the case for much longer.
“Regulators internationally and in many jurisdictions have begun the work. It needs to be pursued as a matter of urgency.”
The Governor pointed to the largely unregulated crypto industry growing to become a $2.47 trillion market, with the majority of them not backed by any asset or fiat currency. “But as the financial crisis showed us, you don’t have to account for a large proportion of the financial sector to trigger financial stability problems,” Cunliffe said, referring to $1.2 trillion of U.S. mortgage market subprime — “a relatively small market” — whose collapse in 2008 reverberated through an unresilient financial system, leading to a global banking crisis. Now, Cunliffe sees the potential of something like this happening in crypto.
“Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the probability of contagion between crypto assets, the cyber and operational vulnerabilities, and of course, the power of herd behaviour.”
He also pointed to the growing connection between the crypto market and the traditional financial system as hedge funds, banks, and big investors become more involved. Not to mention the recording and transferring ownership of assets is the “bedrock of the financial system’s role in storing value and in making transactions,” which crypto allows without the banks or custodians.
“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice.”
He also said the unregulated, decentralized finance (DeFi) presents “pronounced” challenges due to the absence of investor protection. The BoE has begun the work on how to manage such risks, he added. Last week, global regulators proposed applying the same principles to stablecoins followed by banks and payment systems. Cunliffe, who helped lead the work on the safeguards, said it took two years to draft the measure.
“Indeed, 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.”