Bank of England Deputy Governor for Financial Stability Jon Cunliffe, has voiced concerns regarding the risks posed by decentralized finance, and as big investors, hedge funds, and banks become more involved.
He believes that there are very good reasons to anticipate a collapse in cryptocurrencies, and wants to urgently pursue regulations that would mitigate risks. Considering that the market capitalization of cryptocurrency is sitting at around $2.3T, and the global financial system is valued at $250T, Cunliffe believes that the industry does not have to have a large market cap to cause a global banking crisis like the one in 2008, and cites price volatility, contagion between assets, and operational vulnerabilities as possible reasons for a collapse.
Following the 2008 financial crisis, central banks and security regulators worked together to ratify unambiguous international standards for payments, which were designed to instill confidence in users.
Cunliffe instrumental in drafting stablecoin proposal
Cunliffe was part of the global collaborative effort to come up with a proposal to apply safeguards applied to systemic clearing houses and payment systems, to stablecoins, which make up 5% of crypto assets, having a market cap of $130M. Stablecoins avoid the volatility of other crypto-assets like Bitcoin, which are not backed by a commodity because their value is supported by a pool of assets. The proposal will provide international jurisdictions with an internationally agreed baseline to use when developing a regulatory framework for domestic and cross-border payment initiatives. This regulation took two years to draft.
Institutional investors pose a greater risk than retail investors, according to Cunliffe
Cunliffe believes that the risk posed by the crypto industry is currently limited, but will grow if regulation proves inadequate and slow. The price volatility of bitcoin that results in investors losing money is not an issue for financial stability; financial stability authorities are there to ensure that price corrections and the consequent losses do not have a negative effect on the financial system at a macro level, causing damage to the economy.
The price corrections amongst crypto assets become more critical the more crypto is connected to the conventional banking system. In the UK, more crypto holders are seeing crypto as an alternative or complement to mainstream investing. It must be stated, though, that the connection of retail investors to the system is less of a financial stability concern than institutional investors like hedge funds showing an interest. Bringing the crypto word within the ambit of regulation will ensure that the benefits of the application of the technology will blossom in a sustainable way.
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