‘Crypto winter’ raises urgency for regulators to bring asset class within oversight: Bank of England deputy governor

THE recent “crypto winter” is sounding the alarm for regulators to “get on with the job” of bringing the use of crypto technologies in finance within their oversight, the Bank of England’s deputy governor for financial stability said on Tuesday (Jul 12).

Crypto regulation should be grounded in the “iron principle of ‘same risk, same regulatory outcome’,” said Sir Jon Cunliffe, who addressed the media in Singapore while en route to attend G20 meetings in Bali.

And in cases where regulators find no way to mitigate and manage risks to the extent that such risks are managed in other parts of the financial system, they should not let activities proceed.

The UK’s government, for instance, has announced its intention to update the powers of the Bank of England and the Financial Conduct Authority to regulate and supervise stablecoins. A consultation document on the regulatory framework proposed is expected by the end of this year, Cunliffe said.

Internationally, the Financial Stability Board announced on Monday that it is working to ensure cryptoassets are subject to “robust regulations and supervision of relevant authorities”. Later this year, it will publish recommendations for promoting international consistency in regulating cryptoassets, markets and exchanges.

He cited the recent collapse of the TerraUSD stablecoin as an example of how technology does not eliminate the inherent risks in finance.

While crypto proponents have argued that their technological design enables them to function as a hedge against economic volatility and inflation, they really behave as “very speculative, risky asset(s)”, Cunliffe said.

To put things in perspective, he noted how gold and the S&P 500 index lost 7 per cent and 18 per cent, respectively, of their values since November against a weakening global economy, higher inflation and monetary policy. In comparison, Bitcoin fell 70 per cent over the same period of time.

“History is littered with examples of similar speculative assets that have made a very large amount of money for those that got out in time - and that have cost those who did not an equally large amount. Technology does not make assets with no intrinsic value a safe or a one-way bet,” he said.

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While the idea of an entirely decentralised financial system is attractive, someone still needs to be held accountable for its operations, he said.

“Most obviously, financial assets with no intrinsic value – that is to say with no real economy assets backing them and no means of generating revenue - are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiment and prone to collapse.”

At this point, crypto is neither large nor integrated enough for recent collapses to pose a systemic risk, but regulators should recognise that given its speed of growth and growing connections with conventional finance, that it could pose such a risk relatively quickly, Cunliffe said.

He acknowledged that international coordination is hard to achieve, but that regulators in each jurisdiction should look at setting standards before a more widespread “crypto winter” befalls.

Innovation and regulation are “friends, not enemies”, he stressed. Although the initial use cases of speculative crypto assets may have a limited future, the technology can give rise to other use cases, such as in supporting retail payments or automating the exchange, clearing, and settlement of financial securities.