Today John Cunliffe, Deputy Governor for Financial Stability at the Bank of England, gave a speech at the SIBOS banking conference about the risks of crypto-assets on financial stability. He said the sector’s rapid growth to $2.3 trillion means it’s time for authorities to “sit up and take notice.” While it’s small compared to the global financial system, he highlighted that in 2008 sub-prime debt amounted to $1.2 trillion.
He concluded that while a significant cryptocurrency price correction would not currently create a stability risk, he doesn’t think that will be the case for long.
“Crypto technologies offer a prospect of radical improvements in financial services. However, while the financial stability risks are still limited, their current applications are now a financial stability concern for a number of reasons,” said Cunliffe.
The primary worry is whether a massive drop in the price of Bitcoin or other crypto-assets could impact the broader financial system. He pointed out that Bitcoin has seen intraday losses of more than 10% on 30 occasions in the last five years. Last March there was a 40% move in a single day.
Cunliffe emphasized he was purely talking about financial stability as opposed to losses that retail investors might incur. However painful those losses might be, they would likely not impact stability. Likewise, crypto hedge funds, which generally involve wealthy family offices, are similar to retail investors.
His big concern is banks, which so far are relatively immune. However, banks are getting involved in cryptocurrency custody, trading futures, offering wealth management to clients, and more. And he pointed to bank industry associations saying that restricting banks from getting involved in cryptocurrencies is not a desirable or sustainable situation.
Hence as bank involvement grows, so do the risks.
Stablecoins and DeFi
Cunliffe also covered the recent papers issued by the BIS and IOSCO, which state the rules for payment infrastructures apply to stablecoins. He believes that this will lead to changes in existing stablecoin arrangements that will reduce risk.
However, it doesn’t address the risk of deposit substitution for banks. He’s not concerned with protecting banks or the status quo but with ensuring that if there’s a rapid transition, it doesn’t cause disruption.
The Deputy Governor also touched on decentralized finance (DeFi), describing the sector as “opaque, complex and undertakes financial activities that carry risk – activities that are regulated with the traditional financial sector.”
The Bank of England has begun work to ensure that risks are managed in the DeFi world to the same standard as traditional finance.