Bank of England’s Analysis on the Systematic Risks of Crypto and the Metaverse

News, Opinion, Regulation | August 10, 2022 By:

Last month, the Bank of England (BOE) warned that cryptocurrencies are “very vulnerable to sentiment and prone to collapse,” urging regulators to “get on with the job” and regulate crypto under the principle of “same risk, same regulatory outcome.”

Jon Cunliffe, Bank of England’s deputy governor for financial stability, shared insights on the recent “crypto winter,” last month at the British High Commissioner’s residence in Singapore.
Cunliffe said that finance carries inherent risks, and while technology can change the way risks are managed and distributed, it cannot eliminate them.

“Financial assets with no intrinsic value … are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiment, and prone to collapse,” said Cunliffe.

According to BOE’s deputy governor, the recent volatility in crypto markets has not posed a risk to the overall financial system, noting that crypto may not be “integrated enough” into the rest of the financial system to be an “immediate systemic risk.”

Cunliffe, however, asserted that without action, systemic risks would materialize, particularly if crypto activity and its connection to banks and other markets continue to increase. He also claimed that the lines separating cryptocurrency from the conventional financial system will “increasingly become blurred.”

Commenting on the news, Mike Crosbie, CBO of poundtoken, said that the Bank of England is right to say that cryptoasset risks must be addressed, as the metaverse grows from its early stages.

“Currencies must be regulated with care and attention to ensure that people and businesses are protected from volatility. This takes time, and it’s right that regulators are taking steps to regulate cryptocurrencies and stablecoins.

That said, we would like to address the Bank of England’s suggestion that stablecoins cannot match the necessary standards for the metaverse. Stablecoins have strived to ensure that they are as trustworthy as possible, working with regulators and custodians to improve security and protection. Our stablecoin, poundtoken (GBPT) is a good example of this; we are working closely with our regulator (the Financial Services Authority), and we are audited by KPMG.

Currencies will evolve alongside reforms and regulations, towards the common goal of safety and stability for their users. As the metaverse develops, we anticipate that these risks will reduce over time. As the Bank of England says, the dangers of high-risk cryptoassets are a possibility rather than an inevitability. We anticipate that systematic stability will come as market forces strive toward trusted currencies in the metaverse.”