A cryptocurrency meltdown is a “plausible scenario” and rules are needed to regulate the fast-growing sector in “emergency”, Bank of England Deputy Governor Jon Cunliffe said on Wednesday.
The financial stability risks associated with the application of crypto technologies are currently limited, but there are a number of “very good reasons” to believe that this may not be the case for a very long time, Cunliffe said.
“Regulators internationally and in many jurisdictions have started the work. It must be pursued urgently, ”Cunliffe said in a speech at the SIBOS conference.
Largely unregulated crypto-assets have grown 200% so far this year, from just under $ 800 billion to $ 2.3 trillion, with 95% of them including bitcoin, not backed by any asset or fiat currency, Cunliffe said.
“But as the financial crisis has shown us, you don’t have to represent a large part of the financial sector to trigger financial stability problems – subprime mortgages were valued at around $ 1.2 trillion in 2008,” Cunliffe said, referring to a corner. the US mortgage market, the collapse of which led to a global banking crisis.
“Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and the resulting price volatility, the likelihood of contagion between crypto-assets, cyber and operational vulnerabilities, and of course, the power of behavior. gregarious, ”Cunliffe said.
Connections between cryptocurrencies and the traditional financial system are also growing as large investors, hedge funds and banks become more involved, Cunliffe said.
Unregulated decentralized finance or DeFi, which provides financial services like credit on the technology behind cryptocurrencies, presents “pronounced” challenges given the lack of investor protection and the BoE has started to work on how these risks can be managed, he added.
Last week, global regulators proposed that the safeguards they apply to systemic clearing houses and payment systems should also apply to stablecoins, a type of cryptocurrency typically backed by an asset or fiat currency. but they only represent 5% of cryptoassets.
Cunliffe, who helped lead the work on guarantees, said it took two years to draft the measure, during which stablecoins increased 16-fold.
“Indeed, bringing the crypto world effectively within the regulatory scope will help ensure that the potentially very significant benefits of applying this technology to finance can flourish in a sustainable manner,” he added.
(Reporting by Huw Jones; editing by David Goodman, Gareth Jones and Nick Macfie)
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