John Cunliffe, the Bank of England’s deputy governor for financial stability, said the risks to the growing crypto market on the financial system are “relatively limited” at the moment, but have the potential to grow very rapidly if regulators do not keep pace.
In a speech to the Society for Worldwide Interbank Financial Telecommunication on 13 October, Cunliffe said that policymakers around the world have begun to develop the necessary framework to properly regulate digital assets, but they need to do so “urgently”. As a matter of” should proceed. The deputy governor spoke about the risks of cryptocurrencies and stablecoins when they are linked to traditional financial systems through individuals, financial institutions, hedge funds and banks.
Given how digital assets continue to work their way into these institutions, sentiment on crypto volatility and otherwise “could cause investors to sell other assets that are considered riskier.” Cunliffe referred to the interrelationship of crypto and traditional finance as the potential for shock “transmitted through the financial system” if something went wrong.
One of the scenarios offered by Cunliffe was if the price of a non-backed cryptocurrency fell to zero. Furthermore, price volatility – even among major cryptocurrencies – “could trigger margin calls on cryptocurrency positions, forcing leveraged investors to find cash to meet them.” This could lead to the sale of other assets and spillovers to other markets.”
“Financial stability risks are currently relatively limited but they could grow very rapidly, as I expect the sector to continue to grow and expand at a rapid pace,” Cunliffe said. “How big those risks may be will depend on the nature and speed of response by regulatory and supervisory authorities.”
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Cunliffe has previously argued that England’s central bank should issue “public digital money that can meet the needs of modern life,” implying that a digital pound could be in the BoE’s future. He is currently co-chairing a task force set up by the UK government to explore the rollout of a central bank digital currency.