Crypto Crackdown: Bank of England deputy warns that stricter digital currency regulation is urgent
October 20, 2021
3 min read
What's going on here?
A senior policy maker at the Bank of England has warned that Bitcoin and other cryptocurrencies may soon risk the financial stability of global economies unless governments prioritise stricter regulation.
What does this mean?
Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England, recently made a speech at Sibos, an annual banking and finance conference, warning of the dangers of the rapidly growing, and largely unregulated, crypto finance market. He said that while they may not currently pose a great risk to financial stability, cryptocurrencies need more stringent regulation “as a matter of urgency”. He urged that without financial stability authorities who “sit up and take notice”, the growing interconnectedness between these currencies and the traditional financial system could send shock waves through international financial markets if a severe fall in the value of crypto-assets, like Bitcoin, Ethereum or Litecoin, were to occur.
What's the big picture effect?
Since the first block of the Bitcoin network was mined in January 2009, the cryptocurrency has seen an explosion of (albeit tumultuous) success across the international finance world. In 2017, it was placed squarely in the mainstream media when its value soared from around the $1000 mark at the start of the year, to over $20,000 in December. Headlines about the considerable peaks and slumps in the value of Bitcoin, and competitor currencies, have dominated business news globally since.
In his speech, Cunliffe noted that in 2021, cryptoassets had grown by around 200% to $2.3tn. While this is on the face of it a small proportion of the $250tn global financial system, he pointed out that financial crises need not be caused by a large proportion of the sector to trigger catastrophe. The infamous 2008 financial crisis was itself triggered by the subprime sector which had a valuation of only £1.2tn.
The volatility in the value of digital currencies was the central theme of Cunliffe’s worries. He flagged that there is evidence that investors in crypto-assets are beginning to borrow money in order to fund their purchases. As digital currencies, particularly those which are not backed by real world assets or commodities, have no intrinsic value, they are “vulnerable to major price corrections”. These circumstances make the fact that cryptofinance is continuing to rapidly develop in an under-regulated space, all more worrying.
Cunliffe is not the only one who has made their fears over cryptocurrencies clear. Algeria, Colombia and Egypt are among the countries where cryptocurrencies are banned. China recently joined this group, having declared all crypto transactions illegal, although it is widely believed that this increased pressure comes from the desire of Chinese authorities to float their own digital currency. In the UK, the Financial Conduct Authority (FCA) have made a number of attempts to regulate the world of crypto-assets, and identify this as a focal point for their development. Digital currency firms must now register with the FCA and satisfy certain standards related to money laundering before they may conduct business in the UK. In October 2020, the FCA banned the sale of crypto-derivatives to retail customers, and in January 2021, it issued a warning to retail customers about the “stark” risks associated with other crypto-related investments: they “should be prepared to lose all their money.” Cunliffe will be only one among many that do not think this is enough and anticipate further intervention from the regulator.
An ominous observation in Cunliffe’s speech was that certain digital currencies had expanded sixteen-fold in the two years it took for CPMI-IOSCO (a partnership between the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions) to produce draft guidance. However, it is also worth noting that Cunliffe qualified himself by saying from the outset that financial stability authorities ought not to jump the gun on regulation, quashing the new approaches cryptocurrencies offer as “‘dangerous’ simply because they are different”. Although seemingly contradictory messages, it is clear that the ideal outcome for regulators, investors and financial institutions alike will be one that cracks down on the potential financial stability risks without hampering the innovation which is driving growth and efficiency globally in the financial sector and beyond.
Report written by Laura Wiles
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