Crypto needs regulation — technology can’t remove all financial risks, BOE’s Cunliffe says

TradeGM Analysis date_range July 14th, 2022

According to Jon Cunliffe, the deputy governor of the Bank of England for financial stability, regulators must “get on with the work” of bringing the use of cryptographic technologies within the “regulatory perimeter.”

On Tuesday, Cunliffe gave a speech at the home of the British High Commissioner in Singapore, where he discussed the current “crypto winter,” which is a period of declining cryptocurrency prices that last for a considerable amount of time.

Technology can alter how risks are managed and distributed, but it cannot eradicate them, he continued, adding that there are inherent hazards in finance.

Financial assets that lack inherent value are solely worth what the subsequent buyer is willing to pay. As a result, they are prone to collapse, highly sentimental, and volatile by nature, according to Cunliffe.

According to CoinDesk data, Bitcoin was trading below $20,000 on Wednesday, its lowest level since December 2020, having dropped more than 70% from its record high reached in November.

The market capitalization of cryptocurrencies decreased from $3 trillion at its high in November to below $1 trillion as a result of investor withdrawals amid a larger sell-off in risk assets.

Cunliffe said he believes the lines separating the crypto sector and the conventional financial system would “increasingly get blurred” even though cryptocurrencies may not yet be “integrated enough” into the rest of the financial system to pose a “immediate systemic danger.”

“The key question for regulators is not what will happen to the value of cryptocurrency assets, but rather what do we need to do to make sure that projected innovation may happen without creating rising and potentially systemic dangers.”

‘Same risk, identical regulatory result.’

Cunliffe stated that the expansion of a regulatory framework to include crypto “must be anchored on the iron principle of’same risk, same regulatory outcome'” as regulators have been raising the alarm about cryptocurrency more and more.

According to him, a stablecoin “must be as safe as the other kinds of money” if it is being used as a “settlement asset” in transactions.

A sort of cryptocurrency known as a stablecoin is designed to monitor a physical item, typically another currency. Many of them make an effort to equate themselves with either the dollar or another fiat currency. Some of them are backed by tangible assets from the actual world, like bonds or money.

To reduce price fluctuation, they were created to provide a reliable store of value. But the demise of terraUSD (UST), an allegedly “algorithmic” stablecoin tied to the dollar, sent shockwaves through the cryptocurrency industry. TerraUSD was not backed by tangible assets, in contrast to other stablecoins. Instead, it was controlled by an algorithm that tried to match the US dollar one to one. That algorithm fell short.

The owners of such stablecoins must have a strong legal claim that enables them to exchange the coin for central or commercial bank money “at par, with no loss of value” within the same day, according to Cunliffe.

In reference to TerraUSD, which fell as low as 26 cents while being intended to preserve a one-to-one U.S. dollar peg, he added, “Needless to say, such a condition is a far way from the world of Terra and Luna.”

Nearly all of the value of its sister token, Luna, which has a floating price and is intended to act as a sort of shock absorber for UST, was also lost.

“The degrees of risk mitigation we have determined to be necessary are implicit in our regulatory standards and frameworks. We must make sure we accomplish the same level of risk mitigation in situations where we cannot apply regulations exactly the same way.

If and when this proves to be impossible for some crypto-related operations, he advised stopping the activities.

According to the Bank of England official, the “same risk, same regulatory result” philosophy must be applied to both domestic and international standards in order to be effective.

Later this year, the U.K. Financial Stability Board will release a consultation paper with proposals for fostering global uniformity in regulatory approaches to non-stablecoin crypto assets, markets, and exchanges, he continued.

Creating proper regulations and managing risks is something that innovators, regulators, and public authorities are interested in, he said.

Only within such a framework, continued Cunliffe, “can innovators truly flourish and can the advantages of technological progress be protected.”

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.42% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. X