Jon Cunliffe, the Bank of England’s Deputy Governor for financial stability, has compared the rate of growth of the cryptocurrency market to that of the subprime mortgage market and warned of a 2008-level financial crisis.
Cunliffe turns into a crypto bear
Just recently, Jon Cunliffe had come out with a speech, stating that the risk of a crisis in the legacy financial markets induced by cryptocurrencies was “limited.” In remarkably fast fashion, the Bank of England’s Deputy Governor reversed course and is now calling for stronger regulation of crypto assets.
He likened the rate of growth of the crypto market from $16B five years ago to over $2.5T at the time of writing to the ballooning subprime mortgage market in 2008. “When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice,” he said. Although governments and regulators should not condemn and regulate crypto assets just for the sake of regulating, Cunliffe pointed out that the majority of them “have no intrinsic value and are vulnerable to major price corrections.” According to Cunliffe, considering that crypto is becoming more interconnected with the traditional financial system by the day, the emergence of leveraged players in this unregulated space was a reason for concern. That echoes statements of Bank of England Governor Andrew Bailey, who warned crypto investors of losing all their investments due to their lack of “intrinsic value.”
Cunliffe also pointed out that crypto’s risk to financial stability in the real world could grow rapidly if the market continues on its current growth path, but that the scale of those risks would depend on the regulatory response by governments. “The forward looking question is what could result from such events, if these cryptoassets continue to grow at scale, if they continue to become more integrated into the traditional financial sector and if investment strategies continue to become more complex?” Cunliffe said.
Crypto is going mainstream
Cunliffe’s statements are remarkable not only because they signal a swift change in opinion on his part but also because cryptocurrencies have garnered increasing attention from traditional investors in recent weeks. Investment legend George Soros, a long-time skeptic of cryptocurrencies, came out with a statement noting that Bitcoin had gone mainstream and that he would consider investing in it. ASX is scheduled to welcome the first crypto ETF in Australia, following the path of recently approved crypto ETFs in the United States. And, of course, retail investors are piling into crypto at breakneck speed, with a study showing the Australian crypto market saw a 186 percent growth in 2021.
Whether regulators are comfortable with it or not, crypto assets are here to stay. Although the Bank of England has legitimate concerns about the unregulated nature of crypto markets, one should also not forget that crypto is driving financial innovation at remarkable speed. Most of it would probably not be possible with heavy regulation, which is why finding a middle ground is such a delicate affair.