The Bank of England (BoE) has called on lawmakers to strengthen the global framework for regulating cryptocurrencies in order to prevent the assets from threatening the overall stability of financial markets.
central bank of great britain Financial Policy Committee (FPC) said the role of prudential and market integrity regulators should be expanded and their coordination increased.
The $1.7 trillion (ยฃ1.3 trillion) crypto market is now bigger than the $1.2 trillion subprime mortgage market that triggered the global financial crisis in 2008.
"Improved law enforcement and regulatory frameworks are needed, both domestically and globally," the BoE committee said in the minutes of its March 9 and 18 meetings, released on Thursday.
The FPC will carry out regular risk assessments, focusing on monitoring risks to systemic financial institutions and core financial markets, risks to the ability to make payments, and the impact on balance sheets in the real economy.
It will make recommendations to the Treasury on adapting the mandate to oversee cryptocurrency holdings, many of which are outside the purview of the Financial Conduct Authority.
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Currently, the watchdog does not regulate cryptocurrencies, however, consumer protection and market integrity risks fall within the purview of the FCA. In January 2022, the FCA proposed stricter rules on how high-risk financial products, including crypto assets, are advertised.
FPC suggested that crypto technology that performs an economic function equivalent to that performed in the traditional financial sector should come under the umbrella of existing regulatory plans.
Crypto assets, such as bitcoin (USD-BTC) and ethereum (ETH-USD) are largely unregulated as they fall outside the legal realm. A law change would be required to bring cryptocurrencies within the full scope of UK securities regulations, something the Treasury is already considering.
While the FPC acknowledged that the risks to the UK financial system from cryptocurrencies and DeFi are currently limited, interest in the market is increasing, leading to more risks going forward.
Evaluate the relationship between cryptos and other asset classes such as gold (GC=F) or equities, the FPC said the correlation remains โshaky,โ as highlighted by relative price movements of cryptocurrencies since the start of the Ukraine war.
"As crypto assets began to become more integrated into investors' portfolios, overall market movements became increasingly correlated with mainstream risk assets such as stocks," the FPC said.
Bitcoin enthusiasts have long touted it as a safe haven to hedge against inflation and other risks in traditional markets, often comparing it to gold.
Until now, gold has eclipsed so-called "digital gold" as a safe haven as Western nations ramp up punitive sanctions against Moscow to isolate it from the global financial system.
Watch: What are the risks of investing in cryptocurrencies?
The central bank wants to ensure that the risks of crypto assets are controlled in the British banking sector until cryptocurrencies are fully regulated under a single network.
Lieutenant Governor Sam Woods has warned banks that long-term regulation of crypto assets is likely to differ from the current framework.
In assessing the City's exposure to crypto assets, the BoE has asked companies to disclose information about their crypto plans.
in a letter to CEOs on ThursdayWoods gave firms a June 3 deadline by which financial services firms are expected to voluntarily report their current and planned cryptocurrency exposures to the BoE this year.
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Noting that companies have had limited exposure to cryptocurrencies, he said that the BoE is โaware of the increased interest of banks and designated investment firmsโฆ in entering various cryptocurrency markets.โ
โThis letter is intended to ensure that where companies have exposures, they understand our expectations around risk management and measurement against the existing prudential framework,โ Woods said.
"They [crypto assets] they have limited track records, different risk profiles, can be characterized by very high volatility, and have market participants and structures that can be significantly different from the other markets in which the companies participate."
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The BoE and FCA will carry out further work on stablecoin rules and consult on a regulatory "blueprint" for systemic stablecoins in 2023, the FPC said.
He added that stablecoins, which are backed by assets or cash, that became systemically important would need to be backed by high-quality liquid assets and loss-absorbing capital similar to that held by banks.
Warning that the use of commercial bank deposits to provide support for stablecoins would pose significant risks to financial stability if carried out on a large scale.
Stablecoins are a class of cryptocurrencies that attempt to peg their market value to some external reference, such as the US dollar or the price of a commodity like gold, to offer price stability.
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Cryptos have recently come under the regulatory spotlight amid concerns that they could be used to circumvent economic sanctions imposed on Russia since its invasion of Ukraine.
In early March, the Joe Biden administration signed a long-awaited executive order on cryptocurrency regulationdirecting agencies to officially recognize and regulate digital assets in the US.
Meanwhile, the parliamentarians of the European Union voted against a new provision in a crypto regulatory framework, which could have seen key digital currencies like bitcoin and ether banned in Europe.
Watch: What is Bitcoin?
