Tech can’t remove all financial risks, crypto regulation needed: BOE

Regulators need to “get on with the job” of bringing the use of crypto technologies within the “regulatory perimeter,” says Jon Cunliffe, Bank of England’s deputy governor for financial stability.

Speaking at the British High Commissioner’s residence in Singapore on Tuesday, Cunliffe shared insights on the recent “crypto winter,” which refers to a period of falling crypto prices that remain low for an long time.

Finance carries inherent risks, and while technology can change the way risks are managed and distributed, it cannot eliminate them, he added.

“Financial assets with no intrinsic value … are only worth what the next buyer will pay. They are therefore inherently volatile, very vulnerable to sentiment and prone to collapse,” said Cunliffe.

Bitcoin has fallen more than 70% from its record high hit in November and was trading below $20,000 on Wednesday, its lowest level since December 2020, according to CoinDesk data.

As investors dumped crypto amid a broader sell-off in risk assets, the market cap of crypto fell below $1 trillion, down from $3 trillion at its peak in November.

Cryptocurrencies may not be “integrated enough” into the rest of the financial system to be an “immediate systemic risk,” Cunliffe said, but he said he suspects the boundaries between the crypto world and the traditional financial system will “increasingly become blurred.”

“The interesting question for regulators is not what will happen next to the value of crypto assets, but what do we need to do to ensure that … prospective innovation … can happen without giving rise to increasing and potentially systemic risks.”

Regulators have increasingly been sounding the alarm about crypto, and Cunliffe said the extension of a regulatory framework to encompass crypto “must be grounded in the iron principle of ‘same risk, same regulatory outcome.'”

“For example, if a stablecoin is being used as a ‘settlement asset’ in transactions … it must be as safe as the other forms of money,” he said.

Stablecoins are a type of cryptocurrency that are supposed to track a real world asset, usually another currency. Many of them attempt to peg themselves one-to-one with the U.S. dollar or another fiat currency. Some of them are backed by real-world assets such as bonds or currencies.

They were designed to offer a sound store of value to minimize price volatility. However, the collapse of terraUSD (UST) — a so-called “algorithmic” stablecoin that’s pegged to the U.S. dollar — sent shockwaves through crypto markets. Unlike other stablecoins, terraUSD was not backed by real assets. Instead, it was governed by an algorithm which attempted to peg it one-to-one with the U.S. dollar. That algorithm failed.

The holders of such stablecoins must have a clear legal claim…