Cryptocurrency crash ‘plausible’, rules needed, Bank of England’s Cunliffe says

A representation of the virtual currency Bitcoin is shown in this illustrative image taken on June 14, 2021. REUTERS/Edgar Sue/Illustration

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LONDON (Reuters) – Bank of England Deputy Governor John Cunliffe said on Wednesday that a cryptocurrency crash was a “reasonable scenario” and that rules were needed to regulate the fast-growing sector as a “matter of urgency”.

Cunliffe said the risks to financial stability from implementing crypto technologies are currently limited, but there are a number of “very good reasons” to believe that this may not be the case for much longer.

“Regulators at the international level and in many jurisdictions have begun work. It must be pursued as a matter of urgency,” Cunliffe said in a speech to the SIBOS conference.

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Cunliffe said largely unregulated crypto assets have grown 200% so far this year, from less than $800 billion to $2.3 trillion, of which 95%, including bitcoin, is not backed by any asset or fiat currency.

“But as the financial crisis has shown us, you don’t have to account for a large percentage of the financial sector to raise financial stability issues — subprime mortgages were worth about $1.2 trillion in 2008,” Cunliffe said, referring to a corner in the U.S. mortgage market that led Its collapse into a global banking crisis.

“Such a collapse is certainly a reasonable scenario, given the lack of intrinsic value and consequent price volatility, the potential for contagion between crypto assets, cyber and operational vulnerabilities, and of course the strength of herd behaviour,” Cunliffe said.

Cunliffe said that the links between cryptocurrencies and the traditional financial system are also growing with the increased participation of large investors, hedge funds and banks.

He added that unregulated decentralized finance or DeFi, which provides financial services such as credit on technology that underpins cryptocurrencies, presents “clear” challenges given the lack of investor protection and the BoE has begun work on how to manage these risks.

Last week, global regulators suggested that the guarantees they apply to clearinghouses and systemic payment systems should also apply to stablecoins, a type of cryptocurrency that is usually backed by an asset or fiat currency, but which makes up only 5% of crypto assets. Read more

Cunliffe, who helped lead the work on collateral, said it took two years to craft the measure, during which time the stablecoin grew 16-fold.

“Indeed, effectively bringing the world of crypto into the regulatory environment will help ensure that the potentially very significant benefits of applying this technology in finance flourish in a sustainable way,” he added.

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(The How Jones Report) Editing by David Goodman, Gareth Jones and Nick McPhee

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