Bank of England has deemed a collapse of the cryptocurrency market a ‘plausible scenario’ and flagged the need for an ‘urgent’ development of a regulatory framework for digital assets. This was stated by Deputy Governor John Cunliffe.
The official described the risks emanating from cryptocurrencies as ‘limited’ for financial stability. At the same time, he noted their growing interconnectedness with the traditional sector.
“Regulators at international and national levels have begun work. This needs to be done urgently,” — Cunliffe said.
The cryptocurrency market in 2021 grew by 200%, to $2.3 trillion. 95% of cryptocurrencies, including Bitcoin, are not backed by fiat money or other assets, according to Cunliffe.
“The 2008 financial crisis triggered the subprime mortgage segment, which was valued at $1.2 trillion. The collapse of the cryptocurrency market is certainly a possible scenario, given the lack of intrinsic value, volatility, high asset correlation, cyber- and operational vulnerabilities, and, of course, the strength of herd behaviour,” he enumerated.
According to the BoE official, links between cryptocurrencies and the traditional financial system are growing as larger investors, hedge funds and banks become more involved in the space.
The unregulated DeFi-sector presents ‘obvious’ problems, given the lack of investor protections. The Bank of England has begun work to manage these risks, Cunliffe added.
“Effectively embedding cryptocurrencies within the regulatory perimeter will provide assurances that society will reap greater benefits from the use of this technology,” he concluded.
In October, Cunliffe, as head of the Payments and Market Infrastructure Committee of the Bank for International Settlements presented a report setting out guidance on the alignment of stablecoin mechanisms with international standards for payments, clearing and settlement systems.
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