Technology Can’t Eliminate All Financial Risks, Crypto Regulation Needed: BOE

Regulators need to “get on with the job” of bringing the use of crypto technologies within the “regulatory perimeter”, says Jon Cunliffe, deputy governor for financial stability at the Bank of England.

Speaking at the British High Commissioner’s residence in Singapore on Tuesday, Cunliffe shared insights into the recent “crypto winter,” which refers to a period of falling cryptocurrency prices that stay low for a long time.

Finance carries inherent risks, and while technology can change the way risks are managed and distributed, it cannot eliminate them, he added.

“Financial assets with no intrinsic value… are only worth what the next buyer will pay. Therefore, they are inherently volatile, highly vulnerable to sentiment and prone to collapse,” Cunliffe said.

Innovators, along with regulators and other public authorities, have an interest in the development of adequate regulation and risk management.

jon cunliffe

Deputy Governor, Bank of England

Bitcoin has fallen more than 70% from its all-time high reached in November and was trading below $20,000 on Wednesday, its lowest level since December 2020, according to data from CoinDesk.

As investors dumped cryptocurrencies amid a sell-off in risky assets, the cryptocurrency market capitalization fell below $1 trillion, down from $3 trillion at its peak in November.

Cryptocurrencies may not be “integrated enough” into the rest of the financial system to be an “immediate systemic risk,” Cunliffe said, but said he suspects the boundaries between the crypto world and the traditional financial system “are They will get more and more blurry.

“The interesting question for regulators is not what will happen after the value of crypto assets, but what we need to do to ensure that… forward-looking innovation… can occur without giving rise to increased and potentially systemic risks.”

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‘Same risk, same regulatory outcome’

Regulators have increasingly sounded the alarm over cryptocurrencies, with Cunliffe saying the extension of a regulatory framework to encompass crypto “must be based on the ironclad principle of ‘same risk, same regulatory outcome’.”

“For example, if a stablecoin is used as a ‘settlement asset’ in transactions…it needs to be as secure as other forms of money,” he said.

Stablecoins are a type of cryptocurrency that is supposed to track a real-world asset, usually another currency. Many of them try to peg one-to-one to the US dollar or other fiat currency. Some of them are backed by real world assets like bonds or currencies.

They were designed to offer a strong store of value to minimize price volatility. However, the collapse of terraUSD (UST), a so-called “algorithmic” stablecoin that is pegged to the US dollar, sent shockwaves through the crypto markets. Unlike other stablecoins, terraUSD was not backed by real assets. Instead, it was governed by an algorithm that tried to peg it one-for-one to the US dollar. That algorithm failed.

Holders of such stablecoins should have a clear legal right to redeem the coin within the day and “at par, without loss of value” in commercial or central bank money, Cunliffe said.

“Needless to say, such a requirement is a long way from the world of Terra and Luna,” he said, referring to TerraUSD, which fell as low as 26 cents even though it is meant to maintain a one-to-one peg to the US dollar. . .

Its sister token Luna, which has a floating price and is intended to serve as a kind of buffer for UST, also lost almost all of its value.

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“Implicit in our standards and regulatory frameworks are the levels of risk mitigation that we have deemed necessary. Where we cannot apply regulation in exactly the same way, we must ensure that we achieve the same level of risk mitigation.”

It recommended that activities be stopped “if and when for certain crypto-related activities this is not possible.”

The Bank of England official said that for the “same risk, same regulatory outcome” approach to be effective, it needs to be translated into international standards and incorporated into national regulatory regimes.

The United Kingdom The Financial Stability Board will publish a consultation report later this year with recommendations to promote international consistency in regulatory approaches for crypto assets, markets and exchanges that are not stablecoins, it added.

Innovators, regulators and public authorities have an interest in developing proper regulation and managing risks, he said.

“It is only within such a framework, that [innovators] can really thrive and that the benefits of technological change can be secured,” Cunliffe added.

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