In a change of tune from the usual crypto-skeptic statements from the UK’s Financial Conduct Authority, the Bank of England has declared that cryptocurrencies only pose a “limited risk” to the country’s financial stability.
Bank of England neutral on cryptocurrencies
According to Jon Cunliffe, deputy governor of financial stability at the Bank of England, a growing cryptocurrency market carries “relatively limited” risks for the UK’s financial stability. That statement came as part of a speech to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) on October 13. Although, Cunliffe warned that risks could grow if regulators do not keep up with the sector’s rapid development. He added that policymakers around the world were only starting to develop the framework needed for the proper regulation of digital currencies but should do so with urgency. Cryptocurrencies and stablecoins could still pose risks if the connection to the legacy financial system through individuals, banks, and shadow banks were to deepen in the future. Considering the deepening interconnectedness between digital assets and these institutions, crypto volatility could still encroach on legacy finance if investors were to sell assets judged to be risky. Cunliffe pointed out how crypto could cause a shock that is “transmitted through the financial system” if prices fall rapidly.
Doomsday scenario feared by the Bank of England
Although Cunliffe underscored the Bank of England’s generally neutral stance on crypto assets, he did mention a couple of doomsday scenarios where crypto could do serious damage to the financial system. One of them would be the price of a major asset like Bitcoin declining sharply that margin calls on the leveraged positions of investors were triggered. He said “how large those risks could grow will depend in no small part on the nature and on the speed of the response by regulatory and supervisory authorities.”
However, veteran crypto investors would argue that the likelihood of the price of an asset going to zero, or even correcting 80% or more, is minuscule. Market corrections, also known as “shakeouts”, happen every few months, and so far, there has been no contagion to legacy finance. Quite the contrary, institutional interest is seen as a positive that could bring much-needed stability to cryptocurrencies.
Central banks are divided on crypto assets
The Bank of England is not the first central bank that has expressed interest in a central bank digital currency. Cunliffe has previously come out in favor of CBDCs, arguing the bank should “issue public digital money that can meet the needs of modern day life.” Crypto proponents argue that central banks hope to crowd out cryptocurrencies by issuing CBDCs instead of outright banning them as China did.
On the other hand, countries like Australia that have delayed consistent crypto regulation seem to be weighing their options. Although crypto regulation is set to change Down Under, the Reserve Bank of Australia has yet to develop a definite position on crypto assets. Australian crypto bulls are still hopeful the RBA will side with them when it comes to regulating crypto assets.