We must set the cryptocurrency rules, the Bank of England admits

Amid concerns that the rapidly growing 1.7 trillion market could eventually become a threat to the larger financial system, city regulators have taken the first step towards creating a British rulebook for cryptocurrencies.

The Bank of England’s Monetary Policy Committee yesterday began thinking about how the cryptocurrency sector should be overseen in a move that marks the beginning of a potential turning point for digital assets, which were still almost completely unregulated.

Under the bank’s proposed approach, crypto activities that reflect conventional financial services will be governed by existing City rules and standards.

“Where crypto technology performs an equivalent economic function in the traditional financial sector, the FPC considers that it should be within the existing regulatory system, and the regulatory scope should be adapted as necessary to ensure an equivalent regulatory outcome,” the committee said in its latest update on financial stability. Said.

Regulators are stepping up their scrutiny over the worrying cryptomarkets that consumers are losing money due to the wild price change in the concern. There are also concerns that digital assets are being used for money laundering and other types of financial crimes.

In contrast to the traditional form of money, which is regulated by authorities such as the central bank, digital currencies are decentralized and viewed as a “wild waste”. Despite their risky nature, they continue to grow in popularity among private and institutional investors, with global cryptocurrencies rising from $ 0.13 trillion in January 2019 to a $ 2.9 trillion peak in November, before returning to about $ 1.7 trillion earlier this month.

There are now over 17,000 different crypto tokens ranging from Bitcoin, which was the first digital currency and remains the most popular, lesser known asset like dogecoin, which originally started as a joke. They are still dwarfed by the size of the larger global financial system, however, which stands at $ 469 trillion.

Although the bank’s monetary policy committee believes that the “direct risk” to the UK’s financial stability from cryptocurrencies is “currently limited”, it will change “if the pace of growth seen in recent years continues”.

Yesterday, as a sign of growing caution from British regulators, the bank’s Prudential Regulatory Authority sent a letter to its so-called “favorite CEO” urging bank officials, insurers and investment firms to be aware of their potential risks. Represented by cryptocurrency.

At the same time, the Financial Conduct Authority has issued a notice to the companies under its supervision to be vigilant about cryptomarkets.

PRA chief Sam Woods warned city firms in his letter that many crypto markets are not “new and tested”.

“They have a limited history, have different risk profiles, can be characterized by very high volatility, and have market participants and structures that can differ significantly from other markets where companies participate.”

He said firms should “consider how or when the characteristics of these markets are adequately captured in their risk management framework”.

Russian banks and oligarchy are believed to be using cryptomarkets to evade far-reaching sanctions imposed by the West in response to the Ukraine invasion. The head of the European Central Bank, Christine Lagarde, said this week that crypto was “definitely being used” to avoid sanctions.

The bank said: “While cryptocurrencies are currently unlikely to provide a viable way to avoid scale restrictions, the possibility of such behavior underscores the importance of ensuring innovation in cryptocurrencies with an effective public policy framework.”

One obstacle that regulators have encountered in evaluating digital markets is the lack of data, which has hampered their ability to measure potential risks. Banks are now trying to bridge this gap, however, and say it will conduct a survey of companies to gather information on their crypto interests. It asked them to respond by June 3 and asked for information about their future exposure through their future crypto plans as well as derivatives and trading books.

One area of ​​the digital market that the bank says could create a “regulatory challenge” is the so-called decentralized money, known as DeFi, when distributed laser technology that is the basis of cryptocurrency, used for other financial products such as loans. It says such services often cross borders and “may not have a specific entity” that may be under control.

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