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A senior Bank of England official says that crypto could potentially be a threat to overall financial stability.
In a new speech, deputy governor Jon Cunliffe weighs the pros and cons of crypto technology. He says that while “a prospect of radical improvements in financial services” exists, current crypto applications present financial stability concerns.
“A severe fall in the value of crypto assets could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.
We saw last year, during the dash for cash, that this dynamic can put pressure on the amount of liquidity in the system. Similarly, there is the possibility of contagion. A large fall in crypto valuations could affect investor risk sentiment more broadly, causing investors to sell other assets that are judged to be risky and those perceived to have a similar investor base.”
The deputy governor also stressed the purpose and function of any future regulation affecting the digital asset space.
“From a financial stability and from a regulatory perspective, what matters is not the underlying technology but how it is used and for what purpose. In other words, we should not regulate technologies but rather the activities the technology is performing.”
Earlier this week, the Bank of England’s Financial Policy Committee (FPC) issued a warning to financial institutions considering jumping into the crypto markets, noting that “systemic risks” could arise if digital assets become further integrated into the financial system.
Read Cunliffe’s full speech here.