The Bank of England is increasingly nervous that a crypto time-bomb is ticking, says Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.
Regulators have been tip-toeing round the crypto world, shouting out occasional warnings to the crowds of speculators, but we now have the firmest indication yet that they will soon be stepping in to break up the block party.
The Deputy Governor of the Bank of England Sir Jon Cunliffe clearly believes the speculation has reached such a level that a crypto time-bomb is now ticking, which could blow up in the face of the financial sector.
With unregulated crypto assets growing 200% this year alone from just under $800 billion to $2.3 trillion, and banks and hedge funds now becoming involved, the Bank of England is worried about contagion if the value of coins and tokens held deflates rapidly.
The warning from the Bank of England comes hot on the heels of a call to action from the chair of the Financial Conduct Authority, Charles Randell in September. The FCA is extremely worried about the collision between social media and the crypto world, with Kim Kardashian’s single post about a token earlier this year considered to be the biggest financial promotion in history. Now, this nervousness about how financially vulnerable younger investors are being targeted by influencers has widened to an anxiety that the crypto wild west could undermine the stability of the financial system. There has been a hesitancy until now to bring crypto currencies into the regulatory sphere because of the risk it will add more legitimacy to the currencies.
It’s clear central banks and regulators see part of the solution lies in pushing this intense interest away from thousands of coins and tokens in the crypto space, towards stable coins, pegged to fiat currencies like the dollar, but they currently only make up around 5% of crypto assets held. The Bank of International Settlements, a global forum for central banks has already set out how clearing and payments services should be applied to stable coins.
There appears to be increasing backing of recommendations made by the influential Basel Committee on Banking Supervision. If banks and other regulated financial institutions dabble in crypto, the committee is considering making them put aside enough capital to cover 100% of potential losses. Giving speculative tokens a high-risk price tag is likely to make crypto currency dealing and investment very expensive and could limit the number of new institutional entrants into the crypto world.
Regulators and central banks are walking a tricky tightrope, recognising the need to foster new decentralised payments technology but ensuring enough rules are in place to prevent runaway speculation infecting the wider financial sector. If the environment is made too cumbersome there is a risk that innovation in the fast moving world of decentralised finance could be quashed, slowing down the efficiency of operations and leaving the UK behind countries which are welcoming crypto with open arms.
