After the Bank of England (BoE) Deputy Governor Sam Woods warned tougher new rules for preventing British banks from building up extensive exposure to crypto assets were needed, senior BoE official Jon Cunliffe has now called for rapid regulation of cryptocurrencies.
Cunliffe labelled the whole cryptocurrency sector a “financial stability concern”.
“Risks in these areas are not the direct responsibility of financial stability authorities and do not normally pose risks to the financial system as a whole,” he warned.
“But they can be a trigger for destabilising market corrections.”
At the annual banking and financial conference SIBOS, Cunliffe reiterated Woods’ words about the rules, which would require banks to hold capital in reserve equal to their Bitcoin exposure, to act as a prevention for the majority of lenders from participating in the crypto space.
“Regulators internationally and in many jurisdictions have begun the work – it needs to be pursued as a matter of urgency,” said Cunliffe before adding that it may not seem like a huge jump since the global financial system is worth approximately $250tn.
However, he then pointed to the 2008 financial crash, saying it was generated by the subprime market which had a far smaller market capitalisation than crypto.
Regulation needed for governments to manage crypto
Cryptoassets have grown by approximately 200% in 2021, from just under $800bn to $2.3tn today.
Cunliffe admittedly said that crypto assets “offer a prospect of radical improvements in financial services”, but cautioned that the “bulk of these assets have no intrinsic value and are vulnerable to major price corrections”.
“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice,” he cautioned.
Even though the BoE’s Financial Policy Committee (FPC) recently declared that cryptocurrencies “pose limited risk to UK financial stability”, in its last report, the IMF also cautioned that while the risks posed by crypto are “not yet systemic”, the situation should be “closely monitored” by governments.
The IMF also added that governments have, as of yet, only introduced “inadequate operational and regulatory frameworks” to manage digital assets.
Charles Kerrigan, a FinTech partner with the law firm CMS said Cunliffe was right about his warnings to urgently fix this issue and make regulators catch up with technological innovation in the crypto space.
“Innovation in crypto is the fruit of years of work by some of the most talented engineers on the planet,” Kerrigan noted.
“The industry is not by and large against regulation. But this technological revolution won’t wait for the regulators.”