Bank Of England Deputy Governor Warns Finance Firms Of Crypto Asset Risksbr>
Sam Woods, deputy governor of the Bank of England and head of the Prudential Regulation Authority (PRA), has warned financial institutions about the risks of exposure to crypto assets.
In a new letter published Thursday, Woods reminded banks, insurance companies and designated investment firms of their obligations to PRA rules, including acting in a prudent manner, having effective risk management systems and strategies, and cooperating with regulators.
While he believes cryptocurrencies have significant potential to benefit the efficiency and resilience of the financial system, Woods said financial institutions should take steps to protect themselves against market volatility and potentially risky investments in the crypto space.
“In their short history, crypto-assets have exhibited high price volatility and relative illiquidity,” Woods said. “Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks. Entering into activity related to crypto-assets may give also rise to reputational risks. These risks are relevant to both the Financial Conduct Authority’s (FCA) and the PRA’s statutory objectives.”
Woods said that a PRA-approved Senior (Insurance) Management Function should be involved actively in reviewing and signing off on the risk assessment framework for any planned business direct exposure to crypto-assets. Financial institutions must also ensure that they are not engaging in “excessive risk taking” and should “conduct extensive due diligence before taking on any crypto-exposure and maintain appropriate safeguards against all the related risks.”
“Classification of crypto-asset exposures for prudential purposes should reflect firms’ comprehensive assessment of the risks involved,” Woods sid. “Although classification will depend on the precise features of the asset, crypto-assets should not be considered as currency for prudential purposes. Where relevant, firms should set out their consideration of risks relating to crypto-exposures in their Internal Capital Adequacy Assessment Process or Own Risk and Solvency Assessment.”