The cryptocurrency is growing fast enough that it will soon become a systemic risk to the UK's financial stability, the Bank of England warned in a report released on Monday (December 13).
The Bank of England's financial stability report for December focuses on four risk areas: COVID and the economy, bank resilience, mortgage measures, and crypto assets.
The crypto market "is probably not a financial stability risk today, but it has all the ingredients for something that could become one," Bank of England Governor Andrew Bailey said at a press conference. "With today's rapid pace of growth, and as these assets become more interconnected with the broader financial system, crypto assets will present a number of risks to financial stability."
Last month Sir Jon Cunliffe, BoE deputy governor for financial stability, warned in a interview with Today UK News that the time is "drawing near".
See also: Regulators Feel Pressure as Banks, Fintechs, and Crypto Firms Compete for Wallet Share
While Bailey did not specify all the risks in his comments, he gave an example, arguing that a "large drop in crypto asset valuations can cause institutional investors to sell other financial assets and potentially transmit shocks through the financial system," and He added that "the use of leverage can further amplify these contagion effects."
Calling for a new regulatory regime for cryptocurrencies both in the UK and globally, Bailey called on banks and other financial institutions to "take an especially cautious and prudent approach to any adoption of these assets until a cryptocurrency regime is established. this type".
Although no major British banks have reported direct exposure to crypto assets so far, some are starting to offer a variety of services, such as crypto derivatives trading or custody services.
The cryptocurrency market continues to grow rapidly, increasing tenfold since the beginning of 2020 to about $ 2.6 trillion last month, equivalent to 1% of global financial assets, the FPC said.
Crypto's Dangerous 1%
Noting that the total market value of crypto assets has increased tenfold in the past two years, Bailey noted that they account for about 1% of global financial assets. That was using a $ 2.6 trillion market cap in November, when cryptocurrencies briefly broke $ 3 trillion during a bullish rally. It is currently at around $ 2.1 trillion, almost half that of Bitcoin.
Bailey also called the "vast majority" of crypto assets "backless," and the report put that figure at "around 95%."
Since cryptocurrencies "have no intrinsic value, [they] they are vulnerable to major price corrections, so investors can lose their entire investment, "he said. That's a point Bank of England officials have raised many times before.
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The report repeated the central bank's call for "better regulatory and enforcement frameworks, both domestically and globally," saying it is "necessary to influence developments in these fast-growing markets."
That said, he noted that such regulations should balance the risks that crypto poses with the need to support financial innovation and competition.
Instability ahead
The bank, which has been aggressively investigating the potential benefits of a central bank digital currency (CBDC) this year, is also concerned about stablecoins, particularly global ones like Facebook's Diem project (formerly Libra), according to the report. He argued that legislation should be passed to "incorporate systemic stablecoins into the Bank's regulatory environment."
That's a concern that grew in urgency last week, when Meta (formerly Facebook) announced that the Novi digital wallet it created for Diem would support Meta's dollar-denominated Paxos stablecoin on WhatsApp owned by Meta.
As the most popular messaging service in the world, WhatsApp has two billion clients.
"We often hear that people use WhatsApp to coordinate sending money to their loved ones, and Novi allows people to do it safely, instantly and without fees," said Stephane Kasriel, Inbound Leader of Novi, on 10 May. December. "Payments will appear directly in people's chat."
That is exactly what has terrified central bankers, financial regulators, and elected officials around the world since the Libra / Diem project was announced. The concern is that a stablecoin on such a large platform could bypass national currencies, removing control of the overall financial system from the authorities.
