The deputy governor said that regulations have not evolved as the industry has grown
Bank of England Deputy Governor for Financial Stability Jon Cunliffe spoke about cryptocurrencies at the Society for Worldwide Interbank Financial Telecommunication on Wednesday, urging regulators to act quickly and take action to contain the risks posed by the market as more and more investors get involved.
In a speech, Cunliffe attributed the potential financial instability associated with cryptocurrencies to their volatility and lack of hedging. The deputy governor referred to the 2008 financial crisis to explain that crypto markets (with a current market cap of about $2.38 trillion) do not necessarily require a large share of the financial sector to cause financial stability concerns.
“The risks to financial stability are relatively limited at the moment, but could increase very quickly if, as I expect, this area continues to develop and expand so rapidly. How big these risks could become depends not least on the nature of the risks and on the speed of response by regulators and supervisors.”, he explained.
Cunliffe suggested that cryptocurrencies are primarily used for speculative investments due to the unpredictability of their value. The bank manager also noted that the volatile nature of crypto assets makes them unsuitable vehicles for making payments, except for criminal purposes. In stark contrast, not many in the UK crypto community are turning away from cryptocurrencies, with most even considering investing more in them.
“However, attitudes towards unsecured crypto assets appear to be changing – in the UK, fewer owners say they view them as gambling, and more see them as an alternative or complement to traditional investments. About half of the existing owners say they will invest more”, it says in the speech.
Cunliffe, who also heads an in-bank CBDC unit, noted that the link between cryptocurrencies and conventional financial institutions is growing stronger as private funds and banks become more involved.
In the past, the deputy governor has argued that the Bank of England needs to introduce publicly issued digital money to help citizens meet the daily demands of life. Last month, Britain’s central bank confirmed it was working with third parties, including PayPal, Monzo, Visa and ConsenSys, on the road to creating a CBDC.
These latest views of the Bank of England complement a warning issued by the IMF on October 1, when the international organization warned of possible financial instability. In the published article, the authors argued that cryptocurrencies not only pose risks to consumer protection, but also make it difficult for central banks to implement their financial policies.