Thursday, March 18, 2021, a passage near the Bank of England (BOE) in London, England.
Holly Adams | Bloomberg | Getty Images
Jon Cunliffe, deputy governor of the Bank of England responsible for financial stability, warned that unless strict regulations are introduced, cryptocurrencies could trigger a global financial crisis.
In a speech on Wednesday, Cunliffe compared the growth rate of the crypto asset market (from $16 billion five years ago to $2.3 trillion now) to the $1.2 trillion subprime mortgage market in 2008.
“When something in the financial system grows very fast, and grows in a largely unregulated space, the financial stability authorities must sit down and pay attention,” he said.
Cunliffe acknowledged that governments and regulators must be careful not to overreact or classify new methods as “dangerous” just because the new methods are different, and pointed out that encryption technology offers the prospect of “radical improvements” in financial services.
However, he believes that although the current financial stability risks are still limited, the current application of encrypted assets constitutes a financial stability problem, because most of them “have no intrinsic value and are susceptible to substantial price adjustments.”
Bitcoin and Ethereum, the two largest cryptocurrencies, plummeted by more than 30% earlier this year before rebounding, and have shown great volatility since their creation. Prices are susceptible to various external factors, from Tesla CEO Elon Musk’s comments to the Chinese government’s regulatory crackdown.
“The cryptocurrency world is beginning to connect with the traditional financial system, and we see the emergence of leveraged players. And, crucially, this happens in a largely unregulated field,” Cunliffe said.
His comments echoed the comments made in May by Andrew Bailey, Governor of the Bank of England, who warned that cryptocurrency investors should be prepared to lose all their funds due to the lack of “intrinsic value” of assets.
The British Financial Conduct Authority also issued a warning on the risky nature of crypto investment.
Cunliffe said that if the market continues to expand at this rate, the risks of financial stability may increase rapidly, but the scale of these risks will depend on the response speed of regulators and governments.
He pointed out that in the past five years, the price of Bitcoin has dropped by nearly 30% in a single day, the biggest of which was a drop of nearly 40% after a cyber incident in Bitcoin and cryptocurrencies in Seychelles. Exchange BitMEX.
“The forward-looking question is, if these crypto assets continue to grow on a large scale, will they continue to integrate more into the traditional financial sector, and whether investment strategies continue to become more complex, and what will be the result of these events?” Conleif said.
Cunliffe believes that whether major price adjustments can be absorbed by the system, causing some investors to suffer painful losses, but avoiding a chain reaction to the real economy, mainly depends on interconnection and leverage.
Cunliffe said that both of these appeared in the subprime mortgage market before 2008, which had a ripple effect and eventually paralyzed the global economy, and both became more prominent in the field of cryptocurrencies. He said that the ability to manage this increasing risk and ensure that the system can withstand major adjustments will depend on the authorities.
Cunliffe said: “Although encrypted finance operates in novel ways, well-designed standards and regulations can and should enable risk to be managed in the encrypted world, just like in the traditional financial world.”
Many regulators around the world have begun to work to establish a public policy framework through which to manage the exponential growth of encrypted assets, but Cunliffe stated that it must be implemented as a matter of urgency.
“Historically, technology and innovation have promoted the progress of the financial industry. Encryption technology has provided tremendous opportunities. Just as [Ralph Waldo] Emerson said: “If you make a better mousetrap, the world will pave the way for you,” he said.
“But it must be a really better mousetrap, not a mousetrap that simply lowers the standard or has no standard at all.”