Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England, said the risks of a growing crypto market to the financial system are “relatively small” at the moment but have the potential to grow very quickly if regulators don’t keep pace.
In a speech on Oct. 13 to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), Cunliffe said policymakers around the world have just started developing the framework needed to properly regulate digital assets, but they are should prosecute him “urgently.” “The Vice Governor spoke about the risks that cryptocurrencies and stablecoins can present when connected to traditional financial systems through individuals, financial institutions, hedge funds and banks.
As digital assets continue to find their way into these institutions, sentiment regarding crypto volatility could lead “investors to sell other assets deemed risky.” Cunliffe referred to the interconnection of crypto and mainstream finance as having the potential for a “financial system-transmitted” shock if something were to go wrong.
One of the scenarios proposed by Cunliffe was that the price of an unsecured crypto asset would drop to zero. Additionally, price volatility – even apparently among major cryptocurrencies – “could trigger margin calls on crypto positions, forcing leveraged investors to find liquidity to satisfy them, causing others to sell off. active and generating spillover effects in other markets “.
“Financial stability risks are relatively small right now, but they could grow very quickly if, as I believe, this area continues to develop and expand at a sustained rate,” Cunliffe said. “The magnitude of these risks will largely depend on the nature and speed of the response from regulators and supervisors.”
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Cunliffe has previously argued that the Central Bank of England should “issue public digital currency that can meet the needs of modern life,” implying that a digital book could be in the BoE’s future. He is currently co-chairing a task force set up by the UK government to explore the deployment of a central bank digital currency.