Technology can not eliminate all financial risks, cryptoregulation is needed: BOE

Regulators must “get on with the job” of bringing the use of cryptocurrencies within the “regulatory perimeter”, says Jon Cunliffe, Bank of England’s Deputy Director of Financial Stability.

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

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

“Financial assets without intrinsic value … are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiments and prone to collapse,” Cunliffe said.

Bitcoin has fallen more than 70% from its record high hit in November and traded below $ 20,000 on Wednesday, the lowest level since December 2020, according to CoinDesk data.

When investors dumped crypto in the middle of a wider sale of risk assets, the market value of crypto fell below $ 1 trillion, down from $ 3 trillion in November.

Cryptocurrencies may not be “integrated enough” with the rest of the financial system to be an “immediate systemic risk,” Cunliffe said, but he suspects that the boundaries between the cryptocurrency world and the traditional financial system will “become increasingly blurred.”

“The interesting question for regulators is not what will happen next to the value of cryptocurrencies, but what must we do to ensure that … potential innovation … can happen without giving rise to increasing and potentially systemic risks.”

Regulators have increasingly sounded the alarm about crypto, and Cunliffe said the expansion of one regulatory framework to include crypto “must be rooted in the iron principle of ‘same risk, same regulatory outcome’.”

“For example, if a stack coin is used as a ‘settlement tool’ in transactions … it must be as secure as the other forms of money,” he said.

Stablecoins are a type of cryptocurrency that is meant to track a fair value, usually another currency. Many of them try to link one-to-one with the US dollar or another fiat currency. Some of them are backed by real values ​​such as bonds or currencies.

They were designed to offer a good value store to minimize price volatility. The collapse of terraUSD (UST) – a so-called “algorithmically” stable currency linked to the US dollar – sent shock waves through the crypto markets. Unlike other stack coins, terraUSD was not supported by real assets. Instead, it was controlled by an algorithm that tried to link it one-to-one with the US dollar. That algorithm failed.

Holders of such stack coins must have a clear legal requirement that enables them to redeem the coin within the day and “on par, without loss of value” in central or commercial bank money, Cunliffe said.

“Needless to say, such a claim is far from the world of Terra and Luna,” he said, referring to TerraUSD, which plunged as low as 26 cents even though it is intended to maintain a one-to-one link to US dollars. .

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

“Implicit in our regulatory standards and frameworks are the levels of risk reduction 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 reduction.”

He recommended that the activities be stopped “if and when for certain crypto-related activities this turns out not to be possible.”

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

Great Britain The Financial Stability Board will publish a consultation report later this year with recommendations to promote international consistency in regulatory approaches to non-stablecoin cryptocurrencies, markets and exchanges, he added.

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

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