Regulators Must Speed Up Crypto Work, Says Bank Of England Official

July 14, 2022
Jon Cunliffe, the Bank of England’s deputy governor, has shared his thoughts on recent crypto instability, suggesting that appropriate regulation will be able to support innovation.

Jon Cunliffe, the Bank of England’s deputy governor, has shared his thoughts on recent crypto instability, suggesting that appropriate regulation will be able to support innovation.

In recent months, there has been instability and losses in the crypto markets, which has been dubbed by some commentators as the "crypto-winter".

This has resulted in a widespread collapse of crypto-asset valuations that has cascaded through the crypto ecosystem and generated a number of high-profile firm failures.

“The totemic indicator of the crypto-winter is that bitcoin, the signature crypto-asset, has lost 70 percent of its value since November,” said Cunliffe, while making a speech in Singapore.

Regulators, of course, have not been slow to comment, he quipped, setting out what lessons can be learned from this situation.

For this, regulatory authorities should continue and accelerate their work to put in place effective regulation of the use of crypto technologies in finance.

In addition, such regulation should follow the principles of the same risk and same rules.

Cunliffe here is echoing a recent speech from his US colleague, Lael Brainard, vice chair of the Federal Reserve, who said: “This is the right time to ensure that like risks are subject to like regulatory outcomes and like disclosure.”

Technologies such as crypto offer the prospect of substantive innovation and improvement in finance, Cunliffe said. “But to be successful and sustainable, innovation has to happen within a framework in which risks are managed.”

“People don’t fly for long in unsafe aeroplanes.”

Although Cunliffe is an advocate of regulation, he did acknowledge that crypto-assets have yet to become a systemic risk to the financial services sector.

“Regulators, myself included, made clear, when crypto reached its highs last year, that it was not yet large enough or integrated enough into the rest of the financial system to be an immediate systemic risk,” he said.

However, regulators also made clear that given the speed of growth and the growing connections with conventional finance, it could pose such a risk relatively quickly. “We needed to get on with the work of bringing it within the regulatory perimeter. Recent events have not, in my view, changed that assessment.”

For now, although crypto-assets are highly speculative assets, Cunliffe predicted that their eventual use case may shift.

Although assets like bitcoin will remain highly speculative and volatile, the central banker suggested that the technologies that have been developed in the crypto ecosystem are likely to be developed more in the traditional financial system.

“In this, we should perhaps be mindful of the ‘Dot Com’ bust at the beginning of this century. The valuation and revenue generation from the original use cases of early online firms was highly speculative and collapsed,” he said. “However, the technology did not go away but rather re-emerged in a different form, focused on the development of platforms which have now come to dominate internet commerce.”

Fostering innovation and managing risks

The question now for regulators is not what will happen next to the value of crypto-assets, but what needs to be done to ensure that these developments, and this prospective innovation, can happen without giving rise to increasing and potentially systemic risks.

“The starting point for regulators should be to apply the same regulation to the risks inherent in the provision of a financial service no matter how it is provided,” he said.

Yet, differences in technology may mean that existing regulations may not work in this new context or, indeed, may not effectively manage the risk.

“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, in other words, the same regulatory outcome.

“If and when, for certain crypto-related activities this proves not to be possible, where we can find no way to mitigate and manage the risk to the extent necessary, that is to say to the extent such risk is managed in other parts of the financial system, we should not let activities proceed,” he argued.

Cunliffe also warned that these failures should not overshadow some of the potential benefits of these technologies.

“A succession of crypto-winters will not, in the end, help the deployment and adoption of these technologies and the reaping of the benefits that they may offer,” he said, but history also has examples of technologies that have been put aside and/or shunned because of dramatic early failures.

Although the causes of the Hindenburg Zeppelin disaster are still debated, he pointed out, it is very probable that the general development of the use of hydrogen in transport was put aside for decades as a result.

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