Bank of England outlines framework for regulating crypto

The Bank of England said the risks to financial stability from cryptocurrencies and DeFi are small, reflecting their limited size and interconnectedness with the wider financial system, as the UK central bank outlined an updated regulatory framework.

The bank’s Financial Policy Committee (FPC) will conduct regular risk assessments with a focus on monitoring risks to systemic financial institutions and core financial markets, risks to the ability to make payments, and impact on real economy balance sheets, according to a report published on Thursday.

While the BOE acknowledged risks to the UK financial system are currently limited, interest in cryptoassets is increasing, with YouGov polling suggesting 9% of people in the UK had bought cryptoassets as of January 2022, up from 5% a year earlier. 

The FPC has further recommended that crypto technology performing an equivalent economic function to one performed in the traditional financial sector should be brought under the umbrella of existing regulatory arrangements, with relevant regulatory perimeters being adapted as necessary to ensure an equivalent regulatory outcome.

Stablecoins — which the UK government has proposed in certain circumstances should come under regulatory supervision of the BOE — will be under particular scrutiny due to concern that widespread adoption could undermine public confidence in money and payments “if a systemic stablecoin used for payments fails to meet its obligations.”

An increase in popularity of stablecoins backed by central bank reserves could also cause “a substantial shift away from household wealth being held as deposits at commercial banks to central bank reserves.” 

“Such a shift could reduce the proportion of money in the economy that is backed by loans issued by commercial banks to the real economy,” stated the report.

 “This means banks would instead need to seek alternative sources of funding, which may be more expensive (for example, long-term wholesale funding) and could reduce the efficiency with which commercial banks extend credit.”

Nevertheless, the BOE reiterated it’s considering the case for issuing a Central Bank Digital Currency, a consultation for which will take place this year.