Back to the list

Bank of England Outlines Need for Enhanced Regulations to Prevent Crypto Markets Becoming a Systemic Risk

source-logo  coincodex.com 06 July 2022 12:27, UTC

Key highlights:

  • The Bank of England says there is a need for enhanced regulation to prevent crypto markets from posing systemic risks
  • According to the U.K. central bank, the recent crypto market turmoil hasn't posed a risk to financial stability, but could do so if the crypto market became more intertwined with the financial system
  • In April, the HM treasury outlined a plan to make the U.K. a global hub for crypto assets and related technologies

Bank of England says enhanced regulations are needed to prevent crypto from posing systemic risks

The Bank of England says that regulatory and law enforcement frameworks for cryptocurrencies need to be enhanced to prevent activity in the crypto asset markets from posing systemic risks. According to the U.K. central bank, the recent turmoil in cryptocurrency markets did not pose a risk for broader financial stability, but the bank says that things could take a turn for the worse if the crypto markets became intertwined more closely with the wider financial system.

In its latest Financial Stability Report, the Bank of England highlighted the drop in cryptocurrency valuations and the vulnerabilities in the crypto asset markets that have come to the forefront recently. The bank also touched on decreased investor confidence in stablecoins:

“These 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.”

Per the central bank, these weaknesses are similar to vulnerabilities in the traditional financial system that were exposed in the past.

According to the Bank of England, the country’s current regulatory framework “may not offer similar protections to central bank or commercial bank money” when it comes to stablecoins that are used for payments.

In May, the cryptocurrency market witnessed the dramatic collapse of UST, an uncollateralized stablecoin that was supposed to maintain a price of $1 through an arbitrage process involving LUNA, the native asset of the Terra blockchain. UST’s market capitalization reached almost $19 billion before it collapsed.

The HM Treasury, which oversees the U.K.’s financial and economic policy, said in April this year that it’s aiming to make the country a global hub for crypto assets and related technologies. Per the announcement, the HM Treasury plans to bring stablecoins within a regulatory framework to recognize them as a form of payment.