Jon Cunliffe, deputy governor of the Bank of England, the country’s central bank, believes the collapse of the crypto market is a “plausible scenario.” In addition, the regulator has said that there is an “urgent” need to develop a regulatory framework for digital assets.
He has said the risks emanating from cryptocurrencies are “limited” for financial stability. At the same time, he has highlighted their growing relationship with the traditional sector and highlighted the need to develop a regulatory framework:
“Regulators internationally and in many jurisdictions have begun the work. It needs to be pursued as a matter of urgency.”
According to the representative of the Bank of England, the crypto market grew by 200% in 2021, to $2.3 trillion. 95% of cryptocurrencies, including Bitcoin, are not backed by fiat or other assets:
“By contrast, the collapse of the $1.2 trillion market in sub-prime mortgage backed securities in 2008 triggered the great financial crisis. Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the probability of contagion between crypto assets, the cyber and operational vulnerabilities, and of course, the power of herd behavior.”
According to the central bank representative, the links between cryptocurrencies and the traditional financial system are growing as large investors, hedge funds and banks become increasingly involved in the digital asset sector.
The unregulated DeFi sector presents “obvious” problems given the lack of investor protection. The Bank of England has begun work to manage these risks, Cunliffe added.