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.

Innovators, alongside regulators and other public authorities, have an interest in the development of appropriate regulation and the management of risk.

Jon Cunliffe

Deputy governor, Bank of England

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.”

‘Same risk, same regulatory outcome’

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 that enables them to redeem the coin within the day and “in par, with no loss of value” in central or commercial bank money, Cunliffe said.

“Needless to say, such a requirement is a long way from the world of Terra and Luna,” he said, referring to TerraUSD, which plunged as low as 26 cents even though it’s meant to maintain a one-to-one U.S. dollar peg.

Its sister token Luna, which has a floating price and is meant to serve as a kind of shock absorber for UST, also lost nearly all of its value.

“Implicit in our regulatory standards and frameworks are the levels of risk mitigation we have judged necessary. Where we cannot apply regulation in exactly the same way, we must ensure we achieve the same level of risk mitigation.”

He recommended that the activities be halted “if and when for certain crypto related activities this proves not to be possible.”

The Bank of England official said that for the “same risk, same regulatory outcome” approach to be effective, it needs to be carried forward across international standards and incorporated into domestic regulatory regimes.

The U.K. Financial Stability Board will publish a consultation report later this year with recommendations for promoting international consistency in regulatory approaches to non-stablecoin crypto assets, markets and exchanges, he added.

Innovators, regulators and public authorities have an interest in developing appropriate regulation and managing risks, he said.

“It is only within such a framework, that [innovators] can really flourish and that the benefits of technological change can be secured,” Cunliffe added.

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