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The official from the central bank discussed the risks that cryptocurrencies and stablecoins may pose when linked to traditional financial systems via individuals, financial institutions, hedge funds, and banks.
The risks of a growing crypto market on the financial system are “relatively limited” at the moment, according to Jon Cunliffe, deputy governor for financial stability at the Bank of England, but have the potential to grow very quickly if regulators do not keep pace.
In a speech to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) on Oct. 13, Cunliffe said policymakers around the world have only just started to develop the framework needed to properly regulate digital assets but should pursue it “as a matter of urgency.” The deputy governor spoke about the risks that cryptocurrencies and stablecoins may pose when connected to traditional financial systems through individuals, financial institutions, hedge funds and banks.
Given that digital assets are continuing to work their way into these institutions, sentiment over crypto volatility and otherwise could cause “investors to sell other assets that are judged to be risky.” Cunliffe referred to the interconnectedness of crypto and traditional finance as having the potential for a shock “transmitted through the financial system” if something were to go wrong.
One of the scenarios that Cunliffe posed was if the price of an unbacked crypto asset were to fall to zero. In addition, price volatility — even seemingly among major cryptocurrencies — “could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.”
“Financial stability risks currently are relatively limited but they could grow very rapidly if, as I expect, this area continues to develop and expand at pace,” said Cunliffe. “How large those risks could grow will depend in no small part on the nature and on the speed of the response by regulatory and supervisory authorities.”
Cunliffe has previously stated that the Bank of England should “issue public digital money that can meet the needs of modern day life,” implying that a digital pound may be in the works. He is currently co-chairing a task force established by the UK government to investigate the implementation of a central bank digital currency.