A cryptocurrency crash is a "plausible scenario" and laws are needed to regulate the fast-growing sector as a "matter of urgency," said Bank of England Deputy Governor Jon Cunliffe.
The risks to financial stability arising from the application of cryptographic technologies are currently limited
But there are a number of "very good reasons" to think this may not be the case for much longer, said Jon Cunliffe.
“Regulators internationally and in many jurisdictions have started work. It needs to be pursued urgently, ”Cunliffe said in a speech at the SIBOS conference.
Largely unregulated cryptocurrencies have grown 200% so far this year, from just under $ 800 billion to $ 2,3 trillion, with 95% of them, including bitcoin, not backed by any assets or fiat currency, Cunliffe said.
"But as the financial crisis has shown us, it is not necessary to take into account much of the financial sector to trigger financial stability problems: subprimes were valued at around $ 1,2 trillion in 2008," Cunliffe said.
He was referring to a corner of the US mortgage market whose collapse led to a global banking crisis.
"Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the likelihood of contagion between cryptocurrencies, IT and operational vulnerabilities and, of course, the power of herd behavior," said Cunliffe. .
Connections between cryptocurrencies and the traditional financial system are also growing as large investors, hedge funds and banks become more involved, Cunliffe said.
DeFi presents "pronounced" challenges
Unregulated and decentralized finance or DeFi, which provides financial services such as credit on the technology behind cryptocurrencies, presents "pronounced" challenges given the lack of investor protection, and the BoE has begun work on how to manage those risks. added.
Last week, global regulators proposed that the safeguards they apply to systemic clearing houses and payment systems should also apply to stablecoins, a type of cryptocurrency typically backed by a fiat asset or currency, but make up only 5% of cryptocurrencies.
Cunliffe, who helped lead the work on safeguards, said it took two years to draft this measure, during which time stablecoins grew 16-fold.
“Indeed, bringing the world of cryptocurrencies effectively within the regulatory perimeter will help ensure that the potentially very large benefits of applying this technology to finance can thrive sustainably,” he added.
Do you also think that the "cryptocurrency bubble" could burst without regulation? Are you going to invest anyway your savings or not? Let us know in the comments below.