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Bank of England on Crypto Market Volatility: Need for Increased Regulation and Law Enforcement

 


The Bank of England is calling for "increased" regulation of cryptocurrencies to counter potential risks to the country's financial stability. Crypto market cap has fallen by over $2 trillion.


In the Bank of England’s Fiscal Policy Committee’s “Financial Stability Report — July 2022,” the Bank of England stated that factors such as crypto market growth and climate change are not “imminent threats” to the UK’s financial system. But that could change in the future. The committee said recent events in the industry, such as extreme cryptocurrency price volatility, "liquidity imbalances", dwindling investor confidence in stablecoins and "unwinding of leveraged positions" could threaten financial stability if left unchecked.


“If left unchecked, systemic risk would arise as crypto activity and its interdependence with the financial system at large continue to evolve,” the Bank of England report said. "Here it becomes clear that increased regulation and criminal prosecution are necessary to counter developments in these markets."

According to the report, there are a "set of vulnerabilities" in the crypto space that have previously similarly played a role in instability in traditional finance. That has caused the market cap to fall from around $3 trillion in 2021 to less than $900 billion now . Since its last report in December 2021, the committee has assisted the Financial Stability Board in coordinating the approach to “uncollateralised crypto assets” with international authorities. The committee also accepts that authorities are looking at crypto as a possible means for Russia to evade sanctions.


In a Tuesday press conference on the committee's report , Bank of England Governor Andrew Bailey reiterated that recent developments in the market had not changed his view that "uncollateralised" cryptocurrencies pose no immediate threat to the financial system. Central Bank Deputy Financial Stability Governor Jon Cunliffe added that the recent slump in cryptocurrencies like Bitcoin ( BTC ) and Ether ( ETH ) has not had a noticeable impact on the country's financial system. This suggests that the crypto market is not big enough yet to materially impact traditional markets.


"Technology doesn't change the laws of business, finance and risk," Cunliffe said. "When an asset is speculative and has no intrinsic value - it's only worth what someone is willing to pay for it - it can go down very quickly when confidence is lost. When people lose confidence because they don't believe that they can maintain their value - think Terra, think Luna - then the whole system comes under pressure."


The Deputy Governor added:

"We now need to put in place a regulatory regime that handles these risks in the crypto world in the same way as they do in the traditional world."

US Treasury Secretary Janet Yellen agrees with the Bank of England on these points. After TerraUSD (UST) lost its peg to the US dollar in May and Tether ( USDT ) briefly fell below $1, Yellen said the stablecoin market is not big enough for a price drop to pose a threat to financial stability of the country would represent. Nevertheless, this harbors risks similar to a run on banks.

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