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On 13 October 2021, The Guardian published this article in which Jon Cunliffe calls for tough regulations of cryptocurrencies and likens the danger that we might face to that of the 2008 financial crash. He says that digital currencies could trigger a financial meltdown if tough regulations don't come into force. He in particular singles out Bitcoin. Probably because it's the biggest and therefore the most attention-grabbing.
To understand why he is suggesting that Bitcoin could cause a financial crash of this nature, you need to understand what happened in 2008. The stock market crash in 2008 was the worst ever single-day drop that markets had ever seen up to that point. Although markets would go on to recover, it certainly dealt shock waves through nearly everybody's finances.
Many people had taken on mortgages and debts that they simply couldn't afford, and lenders were so relaxed that they were giving money to people left and right. Lenders were then repackaging these loans and selling them on the secondary investment market. As house prices continue to fly up this subprime mortgage market grew massively too. Because house prices and equity were rising quickly people began to feel invincible. That was until the housing market slowed down and the bubble burst.
What Jon Cunliffe is suggesting is that the rise in the value of the crypto markets is very similar to the rise in the value of those subprime mortgage markets. That market could be rocked by an event in the future of similar magnitude. What could that event be? There are a number of threats to the crypto market.
The biggest threat that there is, is regulation which is interesting because that's exactly what he's calling for. It is almost like the legalized cannabis argument. While it remains illegal, you drive shady deals. Legalize it and you could solve those problems. But accepting that is highly unlikely. They must instead accept it's here to stay and find a way of making it a safer space.
The crypto market is worth about 2.3 trillion dollars but one interesting stat is when taken in the context of global markets being worth 250 trillion it's only a small portion at less than one percent. But like a house of cards precariously stacked, it only takes one to fall to cause a bigger collapse.
The subprime mortgage market was only worth 1.2 trillion in 2008 and we know how that went. The fear here is that as crypto becomes more popular and FOMO increases, people will start to stake more than they can afford to lose. What's even worse is that they could even start borrowing money to invest more. It's this borrowing that Jon Cunliffe is particularly worried about.
Jon Cunliffe also stated that crypto has no intrinsic value. As people begin to borrow to invest more into crypto, it creates a stronger link between the crypto market and traditional markets. Do not forget, crypto is an unregulated space and although that's the attraction for many investors, it does increase the risks.
There is no one there to catch you if you fall. In my personal opinion, I think regulation is inevitable. Going back to the article, he says that the risks are relatively limited. But the fear is that as crypto markets grow at this rapid pace, so do the risks. He talks about the nature and speed of regulation and how difficult it is to do it properly when the markets move at this rapid pace.
What this tells me is that regulation is coming. However, it took them two years to draft some general guidance, and, in that time, trading platforms for digital currencies grew 16-fold. With organizations as big as the regulator, it’s going to take a long time. I think that is their biggest concern at the moment, the crypto markets wait for no man, not even the Bank of England.
The truth of the matter is very different from the picture painted by Jon Cunliffe. First and foremost, the subprime mortgage crisis was created by corporate dishonesty that very literally affected the lives of everyday people with mortgages. Those who had mortgages had no voluntary input into whether or not they wanted to be a party to the crisis and the risks were fraudulently hidden from consumers.
When you compare that with the crypto market, investors go in voluntarily and hopefully understand the risks associated with investing. No one has a gun to their head and there is no hidden risk that can come back to cause the havoc that the corrupt banks and financial institutions did with the subprime mortgage crisis.
Furthermore, the idea that cryptocurrency has no intrinsic value is propagandist deception at its finest. Cryptocurrency has as much intrinsic value as fiat currency. It has value in the same way, people believe it has value. If people lost faith in the Pound Sterling, the market would collapse - it has no more value because it is printed on paper than a cryptocurrency has. In fact, arguably, you could say that cryptocurrency has more value than fiat money because of the safe, blockchain tech that it runs on.
As a crypto investor, don’t be fooled into thinking that your crypto is risk-free, but equally don’t be fooled into thinking that central banks and financial institutions have your best interests at heart when they issue such warnings. Remember it was them that had their own interests at heart when they manipulated the mortgage market - and today, they still have their own interests at heart.