Crypto market volatility shows need for 'enhanced regulatory and law enforcement frameworks'

The central bank said the growth of the crypto market did not pose an “immediate threat” to the United Kingdom’s financial system, but had the potential to do so in the future.

The Bank of England has called for “enhanced” regulations of crypto to address potential risk to the country’s financial stability amid the market capitalization dropping more than $2 billion.

In the BoE’s Financial Policy Committee „Financial Stability Report — July 2022,“ the central bank said factors including the growth of the crypto market and climate change did not pose an “immediate threat” to the United Kingdom’s financial system but had the potential to do so in the future. The committee noted that recent events in the space including extreme price volatility among cryptocurrencies, „liquidity mismatches,” weakening investor confidence in stablecoins and “leveraged positions being unwound” could threaten financial stability if left unchecked.

“Unless addressed, systemic risks would emerge if cryptoasset activity, and its interconnectedness with the wider financial system, continued to develop,” said the BoE report. “This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities.”

Our latest Financial Stability Report sets out what we are doing to make sure the UK’s financial system stays strong. https://t.co/HrpZV9ufUm #FinancialStabilityReport pic.twitter.com/4M8Lb2IHhQ

— Bank of England (@bankofengland) July 5, 2022

According to the report, a “number of vulnerabilities” within the crypto space were similar to those that had previously been a part of instances of instability in traditional finance, leading to the market capitalization dropping from roughly $3 trillion in 2021 to less than $900 billion at the time of publication. Since its last report in December 2021, the committee said it had supported the Financial Stability Board coordinating its approach to “unbacked cryptoassets” with international authorities and accepted authorities considering crypto as a possible means for Russia to evade sanctions.

In a Tuesday press conference on the committee’s report, BoE governor Andrew Bailey reiterated that recent market forces had not changed his views on “unbacked” crypto not posing an imminent threat to the financial system. The central bank’s deputy governor for financial stability Jon Cunliffe added the recent price drop of cryptocurrencies including Bitcoin (BTC) and Ether (ETH) hadn’t had a noticeable impact on the country’s financial system, suggesting the crypto market isn’t at a size to significantly affect traditional ones.

“Technology doesn’t change the laws of economics and finance and risks,” said Cunliffe. “If an asset is speculative and has no intrinsic value — it’s only worth what somebody pays for it — it can go down very quickly when confidence is lost […] If people lose confidence in that because they don’t see how it’s going to maintain its value — think Terra, think Luna — then you’ll see stress across the system.”

The deputy governor added:

“We need now to bring in the regulatory system that will manage those risks in the crypto world in the same way that we manage them in the conventional world.”

Across the pond, United States Treasury Secretary Janet Yellen seemed to agree with BoE’s conclusions. Following TerraUSD (UST) depegging from the U.S. dollar in May and Tether (USDT) briefly dipping below $1, Yellen said the stablecoin market was not at the scale at which a price drop would present a threat to the country’s financial stability, but still presented risks similar to bank runs.