BoE Advocates Monitoring Crypto Markets Despite Posing no Immediate Threat
The Bank of England (BoE) through its Financial Policy Committee (FPC) spent a little time talking about cryptocurrencies in its latest Financial Stability report released on Tuesday.
According to the FPC, digital currencies are becoming significant as an industry, however, despite their growth, they do not pose an immediate threat to the financial ecosystem. Despite this, the FPC recommends keeping an eye on the nascent industry for changes in the near future.
The FPC highlighted the vulnerabilities in the digital currency ecosystem, citing the collapse of the industry’s combined crypto market capitalization from $3 trillion back in November to less than $1 trillion today.
According to the FPC, these vulnerabilities include “liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls. Investor confidence in the ability of certain so-called ‘stablecoins’ to maintain their pegs was weakened significantly, particularly those with no or riskier backing assets and lower transparency.”
Comprehensive Regulations Sweeping Crypto Industry
The slump in the global crypto ecosystem has fueled a lot of companies’ collapse in recent weeks.
The vulnerabilities being perceived as fueled by crypto assets’ volatilities account for why many governments around the world are exploring avenues to tame the industry through regulations. While the EU recently agreed on the final framework for Markets in Crypto Assets (MiCA) last week, the Japanese government also has a sweeping regulation on stablecoins in the country.
While not anticipating any immediate threat to the financial landscape in the UK, the FPC, through the report, recommended that there is a “need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities.”
The collapse of the UST algorithmic stablecoin has forced a lot of regulators to shine their radars on stablecoins in general. While Japan is ahead in regulating this fiat-pegged asset, MiCA also has clearly defined provisions for stablecoin issuers within the EU. In the same vein, the FPC is particularly concerned about stablecoins and noted that they are some of the offshoots of the crypto ecosystem that must be adequately regulated.
The BoE report said the regulation of stablecoin is essential as “some stablecoins held to be used for payments may not offer similar protections to central bank or commercial bank money.”
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