The Bank of England, in a report, has made claims that the sharp volatility of crypto assets gives the asset class the potential to pose a “systemic risk” to financial stability within the country. It believes this potential will be especially pronounced should the relationship between crypto and the general financial system continue growing.
The BoE thinks systemic risks could emerge if crypto activities are left unchecked.
In its Financial Stability Report of July 2022, compiled and published by the Financial Policy Committee, the Bank of England released an elaborate account, identifying current and potential risks to the country’s financial stability.
In the report, the BoE noted the volatility of crypto assets, including stablecoins which it said have recently lost investors’ confidence following the de-pegging wave that hit some notable stablecoins after the Terraform’s UST collapse that imbued a form of commotion within the crypto space. It also noted recent unfortunate events that have hit the crypto space.
While the BoE said this volatility of digital assets and the recent events plaguing crypto due to the bear market does not, in essence, currently pose any risk to the country’s financial stability, it says there is the possibility of that effect in the future especially if regulatory frameworks are not set up to check the activities of the industry.
Some of the events highlighted include the fall of the market cap of the general crypto market to $900 billion from the $3 trillion peak of last year; fire sales influenced by liquidity mismatches; the wage of deleveraging that has hit some crypto entities; and the fall of stablecoins that were meant to be untouchable despite market conditions.
“These events did not pose risks to financial stability overall,” the report says, “but unless addressed, systemic risks would emerge if cryptoasset activity, and its connectedness with the wider financial system, continue to develop.” The bank further highlighted the importance of establishing standard regulations to check crypto activities.
The UK government plans to make the country a global crypto hub
The Bank of England has for some time indicated an interest in CBDCs, setting up the necessary structure for establishing one, as it looks into utilizing the benefits of blockchain.
Chris Philp, the UK digital minister, said sometime last month that the UK government plans to make the country a global crypto hub. Stablecoin issuer, Tether recently announced the launch of its GBPT – a stablecoin pegged to the Pound – citing the UK’s friendly approach towards CBDCs and crypto as a major influence of the move.
However, not every UK agency thinks favorably of crypto. In June, following the evident effects of the cold pangs of the crypto winter, BoE governor Andrew Bailey reiterated his stance on crypto, argued that cryptocurrencies have no intrinsic value.