The Central Bank's Warning on Crypto

The Bank of England has called for "stronger" regulations of crypto to address the potential risk to the country's financial stability after the market capitalization dropped by over $2 billion.

In the July report on financial stability by the BoE's Financial Policy Committee, the central bank said that factors such as the growth of crypto market and climate change do not pose an "immediate threat" to United Kingdom's financial system, but could do so in the future. The committee pointed out that recent events in space including extreme price volatility among cryptocurrencies, "liquidity mismatches," declining confidence in stablecoins and "leveraged positions being unwound" can threaten financial stability if left unchecked.

"The BoE report said that if crypto assets and the wider financial system continue to grow, systemic risks will emerge. This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities,"

The report said that the crypto market was vulnerable to the same types of risks that had been seen in earlier instances of financial instability, and as a result, its market capitalization dropped from $3 trillion in 2021 to less than $900 billion when it was published. Since its last report in December 2021, the committee stated that it supported the Financial Stability Board coordinating its actions with international authorities on "unbacked cryptoassets" and accepted authorities considering crypto as a possible way for Russia to circumvent sanctions.

In a press conference on the committee's report, BoE governor Andrew Bailey reiterated that recent market forces had not changed his views on "unbacked" crypto not posing an imminent threat to the financial system. The central bank's deputy governor for financial stability Jon Cunliffe added the recent price drop of cryptocurrencies including Bitcoin (BTC) and Ether (ETH) hadn’t had a noticeable impact on the country’s financial system, suggesting that the crypto market isn't big enough to significantly affect traditional ones.

"Technology doesn't change the laws of economics and finance and risks," said Cunliffe. "If an asset has no intrinsic value - it's only worth what somebody pays for it - it can go down quickly when confidence is lost [...] If people lose confidence in that because they don't see how it will maintain its value, think Terra, think Luna, then you'll see stress across the system."

The deputy governor explained:

“We need now to bring in the regulatory system that will manage those risks in the crypto world in the same way that we manage them in the conventional world.”

In the United States, U.S. Secretary of Treasury Janet Yellen seemed to agree with BoE's conclusions. After TerraUSD (UST) decoupled from the U.S. dollar in May and Tether (USDT) briefly fell below $1, Yellen said that the stablecoin market was not at a scale where a price drop would present a threat to the country's financial stability but still presented risks similar to bank runs