Crypto Market Too Dangerous Not to Regulate

The deputy governor of the Bank of England (BoE) has warned that cryptocurrency trading is “too dangerous” to remain unregulated adding that it could pose “a systemic problem” if action is not taken.

In an exclusive interview with Sky News, Sir Jon Cunliffe, deputy governor of the Bank of England, said that investors and the financial system need to be protected from the “casino” of cryptocurrency trading. Speaking for the first time since the collapse of the crypto exchange FTX, Cunliffe indicated that the BoE might soon regulate the industry to protect investors from the dangers of crypto trading, as well as the wider financial system against potential fallout associated with cryptocurrencies. Cunliffe said that the BoE’s stance is that retail investors should be able to safely speculate on cryptocurrencies, as they do in traditional markets.

Cunliffe said:

I think for the majority of people if they do want to be involved in speculation in [crypto] … for consumer protection and market integrity, they should have a place to do that where they get the protection they would get in a similar activity in the UK.

Crypto is Becoming Increasingly Integrated into Traditional Financial Systems

The deputy governor added that cryptocurrencies are becoming increasingly integrated into the traditional financial system and therefore should be regulated soon rather than later. He noted:

I do not know how that would [have] developed, but we had banks and investment funds and others who wanted to invest in it.

During his interview with Sky News, Cunliffe said the trading of crypto assets has not yet been sizeable enough to destabilise the financial system, “but it was starting to develop links.” On that note, and commenting on the BoE’s future plans to manage digital assets, Cunliffe added:

I think we should think about regulation before it becomes integrated with the financial system and before we could have a potential systemic problem.

UK’s Regulatory Efforts

According to the reports by Sky News, in the UK, regulators have attempted to, and failed, “to impose their write on crypto exchanges domiciled offshore.” When the now Prime Minister Rishi Sunak was chancellor of the exchequer, the government made it clear that its goal was to make the UK a “global crypto asset hub” – something which naturally will depend largely on an effective regulatory framework.

Cunliffe, in his role as being responsible for financial stability, said that the BoE’s previous regulatory efforts were aimed at protecting individuals and maintaining financial stability – a common goal of central banks. He said:

There’s a lot of activity that’s developed over the last 10 years on the trading and sale of crypto assets, assets without any intrinsic value, so they’re incredibly volatile. And all of that has grown up outside of regulation.

In an attempt to explain the absolute need for effective regulation, the deputy governor drew upon the collapse of FTX to highlight his point:

What we saw in FTX… is a number of activities which in the regulated financial sector, would have had certain protections. We saw things like clients’ money appears to have gone missing, conflicts of interest between different operations, transparency, audit and accounting. All of the perhaps boring things that happened in the normal financial sector, didn’t really happen in that set of activities. And as a result, I think a lot of people have lost a lot of money.

BoE is in the Process of Developing its Own Digital Coin

Cryptocurrencies aside, the BoE does see the value in blockchain technology. The Central Bank is currently consulting on plans to develop its own central bank digital coin, a digital version of its currency that would offer the same security as a pound coin, but with the added benefit of digital flexibility that could see it replace cash. Recognising the value of a digital currency, Sir Jon commented:

Physical cash will always be made available by the bank as long as people want it and many people depend on it. But it’s not fully usable in the way we live now. So the question for the Bank of England is that as the way we as society changes, as we live our lives more digitally, should we continue to provide money to the public which is usable across a range of transactions?

He further said:

This would be a digital equivalent of the’ I promise to pay the bearer’ promise, which in the end underpins confidence in money in the UK. Whenever you want, you can turn that money you hold in the bank into basically Bank of England money backed by the state with that promise to pay the bearer.

Finally, realising that physical cash is becoming less feasible and practical, Sir Jon said:

We want to ensure that as physical cash becomes less usable in many parts of the economy, perhaps we need to offer something digitally to provide that underpinning.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.