Regulate Before The Next FTX, Warns Bank of England’s Cunliffe

November 23, 2022
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The crypto platform’s downfall has only enhanced the need for regulation, the Bank of England’s deputy governor has said, while also discussing the possibility of a digital pound.

The crypto platform’s downfall has only enhanced the need for regulation, the Bank of England’s deputy governor has said, while also discussing the possibility of a digital pound.

“We should continue to bring these activities and entities within regulation,” said Jon Cunliffe, the Bank of England’s deputy governor, in a keynote address.

This is due to the need to protect consumers and investors, as well as financial stability.

“Whether or not one thinks it is sensible to invest or trade in the highly speculative assets that make up most of the activity in the crypto world, investors should be able to do so in transparent, fair and robust marketplaces,” he said, adding that this should be possible through protections that they would be offered in conventional finance.

Cunliffe acknowledged that “there will probably always be some who prefer, for a variety of reasons, to invest and trade in an unregulated, opaque world”, while speaking at the Warwick Business School’s Gilmore Centre Policy Forum Conference on DeFi & Digital Currencies.

However, he argued that this should not mean that the majority are exposed due to no regulatory alternatives.

“While the crypto world, as was demonstrated during last year’s crypto winter and last week’s FTX implosion, is not at present large enough or interconnected enough with mainstream finance to threaten the stability of the financial system, its links with mainstream finance have been developing rapidly,” he warned.

Cunliffe advised that the authorities should not wait until it is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact.

“The experience in other areas of digitalisation has demonstrated the difficulty of retrofitting regulation on new technologies and new business models after they have reached systemic scale,” the deputy governor pointed out.

“Untangling exactly what happened at FTX will no doubt take a great deal of time, effort and investigation by the relevant authorities,” arguing that issues such as corporate governance are managed more effectively as a result of regulation in traditional finance.

Different tradition

In addition, he noted that FTX, along with a number of other centralised crypto trading platforms, appear to operate as conglomerates, bundling products and functions within one firm.

“In conventional finance these functions are either separated into different entities or managed with tight controls and ring-fences,” he said, adding that bundling that took place was organisational, rather than technological.

“Crypto was born in an unregulated space, indeed, part of the objectives of its early developers was to create a financial system outside regulation,” he said.

For Cunliffe, the experience of the past year has demonstrated that it is not a stable ecosystem. Part of the reason behind this is because its foundation is completely unbacked instruments of extreme volatility that can swing wildly in value.

However, it is also partly because the crypto institutions at the centre of much of the system exist in a largely unregulated space and are very prone to the risks that regulation in the conventional financial sector is designed to avoid, he pointed out.

Cunliffe has some unlikely allies here in the crypto community itself. Established firms, including Binance, Galaxy Digital and Ripple, said during a hearing at the UK’s House of Commons last week that they would welcome a regulatory framework.

The representative for Ripple even suggested adopting a similar legal framework to that of the EU, which is due to vote through the Markets in Crypto-Assets regulation in the coming months.

Digital pound

During his speech, Cunliffe also spoke about the possibility of a digital pound.

“Given the trends away from physical cash, which cannot be used in an increasingly digital economy, and, potentially, towards new forms of tokenised money, a digital pound may be needed in future,” he said.

Although he did not delve too deeply into the matter, he did suggest that investigative work into a digitally native pound should not be seen in the context of the status quo but rather in the context of how current trends in money, payments and technology might evolve.

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