The Financial Policy Committee (FPC) of the Bank of England has warned that the trend of merging the fast-growing cryptocurrency market with the traditional market carries serious risks.
“The market capitalization of crypto assets has grown tenfold since the beginning of 2020 to $ 2.6 trillion in November 2021, which is about 1% of the world’s financial assets. The vast majority of this market (about 95%) consists of “unsecured” cryptocurrencies with no underlying assets, ”the FPC said in a report.
The British regulator agrees that cryptocurrencies can bring a number of benefits, including improving the efficiency of financial services. However, innovation can only be sustainable if it is done safely and is supported by public policy frameworks that reduce risk.
The FPC report notes that crypto assets now carry limited direct risks to the UK’s financial stability. However, they will pose a broader range of risks if they continue to grow at this rate and become more interconnected with the financial system.
“For example, a significant drop in the value of cryptoassets could force institutional investors to sell other financial assets and possibly send signals through the financial system. Using leverage can further exacerbate these side effects. ”
According to the regulator, a strengthened regulatory framework is needed at both the national and global levels to influence the development of these fast-growing markets, manage risks, encourage sustainable innovation and maintain the integrity of the financial system.
The FPC believes that financial institutions should take extra care and prudence when accepting cryptoassets until clear legislation is in place.
In October, Bank of England Deputy Governor John Cunliffe urged international regulators to develop cryptocurrency regulation rules as soon as possible. Earlier, he called bitcoin a greater threat to financial stability in comparison with stablecoins and expressed support for the digital currencies of the Central Bank.