Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England, said the risks of a growing cryptocurrency market in the financial system are “relatively limited” at the moment, but have the potential to grow very quickly if regulators don’t keep pace. .
In a speech to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) on October 13, Cunliffe said Policymakers around the world have only just begun to develop the necessary framework to properly regulate digital assets, but they should pursue it “as a matter of urgency.” The lieutenant governor spoke about the risks that cryptocurrencies and stablecoins can pose when connected to traditional financial systems through individuals, financial institutions, hedge funds, and banks.
As digital assets continue to make their way to these institutions, sentiment about cryptocurrency volatility and otherwise could cause “investors to sell other assets that are considered risky.” Cunliffe referred to the interconnectedness of cryptocurrencies and traditional finance as having the potential for a shock “transmitted through the financial system” should something go wrong.
One of the scenarios Cunliffe raised was if the price of an unbacked crypto asset fell to zero. Furthermore, price volatility, even apparently among major cryptocurrencies, “could trigger margin calls on crypto positions, forcing leveraged investors to find cash to satisfy them, leading to the sale of other assets and generating indirect effects on other markets “.
“The risks to financial stability are currently relatively limited, but could grow very rapidly if, as I hope, this area continues to develop and expand at pace,” Cunliffe said. “The magnitude of these risks will depend largely on the nature and speed of the response of the regulatory and supervisory authorities.”
Cunliffe has already argued that the central bank of England it should “issue public digital money that can meet the needs of modern life,” implying that a digital pound may be in the future of the BoE. He is currently co-chair a working group created by the UK government to explore the launch of a central bank digital currency.