Sir John Cunliffe, the deputy governor of financial stability for the Bank of England, has issued a warning about cryptocurrencies recently. The official warned that these digital currencies are sensitive to sentiment and can collapse as a result. He also urged regulatory authorities to speed up their efforts of regulating cryptocurrencies and use the ‘same risk and same regulatory outcome’ principle to accomplishing this objective.
The executive of the Bank of England was in Singapore at the residence of the British High Commissioner this week, where he spoke about crypto regulations and risks. He said that the worth of financial assets without any intrinsic value is what the next buyer is willing to pay for them. Therefore, he asserted that these assets are volatile by nature and it makes them prone to collapse because of their susceptibility to sentiment.
He went on to say that some of the crypto assets in the market have absolutely no backing whatsoever, which means they are just speculative in nature. He referred to bitcoin in this case. He also made the same warning he had made earlier; if you are investing your money in crypto assets, then you should be prepared to lose all of it.
Need for regulation
According to the British central banker, the overall financial system did not feel any such impact of the recent volatility that had been seen in the crypto market. He said that this indicated that cryptocurrencies had not ‘integrated’ enough with the traditional financial system as yet, so they did not pose a systemic risk, at least not right away.
However, Cunliffe asserted that the boundaries between the traditional financial system and crypto would become blurred significantly down the road. This would give rise to systemic risks if no action is taken, especially if the crypto activity is linked to banks and it continues to interact with other markets. Therefore, he added that it was a must for regulatory authorities to introduce regulations for the crypto space.
Cunliffe said that it was not the question of the value of crypto, but about ensuring that prospective innovation can happen without posing any systemic risks.
He opined that the same regulatory standards should be used for crypto that is used in the case of other risks. Cunliffe said that they had already added levels of risk mitigation required in their regulatory frameworks and standards, which makes them appropriate. He added that if regulation cannot be applied in the same way, then the same extent of risk mitigation should be achieved in whatever way possible.
He also proposed that if it is not possible to achieve this goal for some crypto-related activities, then they should be halted. Lael Brainard, the Vice Chair of the Federal Reserve, also issued a similar warning last week about cryptocurrencies. He said that the industry is prone to the same risks as the traditional finance world and the regulatory perimeter should include the crypto ecosystem to mitigate them.