Deputy Governor for Financial Stability at the Bank of England Jon Cunliffe addressed the “Crypto Winter”, financial risk in the sector, and regulation. Speaking at an event at the British High Commissioner’s Residence in Singapore, Cunliffe shared four lessons pull out of this sector.
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The Deputy Governor supported his claims that digital assets have entered a Crypto Winter due to the 70% decline in the price of Bitcoin, and the failures of “high profile firms”. In that sense, he emphasized the need to implement “effective regulation of the use of crypto”.
Cunliffe proposed the implementation of a regulatory principle that claims regulations for an asset should be proportional to its risk. In that sense, he acknowledged digital assets have the potential to improve the financial system, but added:
(…) to be successful and sustainable innovation has to happen within a framework in which risks are managed: people don’t fly for long in unsafe aeroplanes.
The Deputy Governor named the collapse of the Terra ecosystem, and its subsequent fallout to strengthen his points. This included the liquidation of major crypto firms such as Three Arrows Capital (3AC) which filed for bankruptcy in the United States.
Cunliffe claimed that digital assets, with their technological innovation, are not impervious to “old risks”. Thus, why he believes the sector needs to be brought into the “regulatory perimeter”.
Of course, Cunliffe also used these events as a way to point out that digital assets lack “intrinsic value”. Eventually, the sector could trigger a bigger fallout, one that could spill into the legacy financial system:
given the speed of growth and the growing connections with conventional finance, it could pose such a risk relatively quickly and we needed to get on with the work of bringing it within the regulatory perimeter. Recent events have not, in my view, changed that assessment.
What Are Regulators Doing To Integrate Crypto?
The Deputy Governor for the Bank of England warned investors that “volatile” assets such as Bitcoin can “collapse” and predicted that the sector could have a “limited future”. However, the use cases could develop further and be integrated into the financial world blurring the lines between the two sectors.
Cunliffe mentioned all the work being done in the Bank of England and across many international bodies to introduce international crypto regulations. As Bitcoinist reported this week, the U.S. Treasury also asked international partners to work on crypto regulation.
Both entities seem to agree on the possibility that non-unified regulatory policies could “amplify” the risk in the digital asset industry. At the same time, Cunliffe spoke about how current regulations “may not work in this new context”, with a nascent asset class.
However, he spoke about not “letting” those activities incapable of following regulations proceed. This may apply to a wide range of products and services in the crypto ecosystem, with stablecoin being the only probable exception, according to the Deputy Governor’s speech.
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In the U.K., regulators are at least launched pilot programs to assess the risk associated with digital assets and to give regulators and government agencies a chance to gain experience in regulating crypto. Still, the Deputy Governor links the “success” of digital assets to their capacity to be regulated.