Bank of England Cites Crypto Integration With Traditional Finance a Risk to Financial Stability

The Bank of England argues that there is potential for crypto to pose greater threats to financial stability with greater integration into the traditional finance system.

The Financial Stability Report released by the Financial Policy Committee, dated July 5, 2022, highlights how the Ukraine-Russia war, supply chain snarls, and tightening monetary policy are squeezing U.K. households and businesses. Prices of riskier assets, including crypto, have fallen and may continue to do so, the bank says, in the face of slower economic growth.

The report noted that liquidity issues, such as those found at Celsius, the unwinding of leveraged positions, and TerraUSD stablecoin collapse were vulnerabilities recently exposed in the crypto markets while acknowledging that these weaknesses had no immediate impact on the financial stability of the U.K. However, it warns that greater coupling between crypto and the traditional financial markets will pose emerging systemic risks if allowed to proceed unchecked.

A similar view was articulated by Jon Cunliffe, Bank of England Deputy Governor responsible for financial stability, in October last year, later echoed by the European Central Bank’s Financial Stability Review published in May 2022. In a speech late last year, Cunliffe criticized the lack of transparency in the crypto space, which made evaluating risks harder.

Accordingly, the FPC advocates the development of comprehensive regulatory and law enforcement frameworks to address developments in the sector.

Consultation on stablecoin and crypto guidance forthcoming

The FPC reiterated its expectations that stablecoins have a stable value, offer legal recourse, and can be redeemed one-to-one for fiat money. It will consult on a recent regulatory proposal by the Exchequer to allow stablecoins to be used as a means of payment in the U.K. The FCP includes Bank of England Governor Andrew Bailey, Cunliffe, Nikhil Rathi, Chief Executive of the Financial Conduct Authority, and several others.

Bailey has been quoted as saying that cryptocurrencies have little intrinsic value.

Brexit affords UK latitude

Brexit allowed the U.K. to divorce itself from European Union laws, which gives it some latitude in developing its crypto regulations. The Financial Conduct Authority has thus far laid down strictures for crypto companies based on anti-money laundering laws.

Chancellor of the Exchequer Rishi Sunak announced a push to make the U.K. a ‘crypto hub’ earlier this year. The chairman of the FCA, however, urged realism in how long it would take the body to prepare to supervise crypto issuers and traders so that investors would be adequately protected, and that the process should not be rushed.