March 24, 2022
Hugh Jones and David Milliken
LONDON (Reuters) – The Bank of England on Thursday began developing Britain’s first regulatory framework for cryptocurrencies, saying that although the sector remains small, its rapid growth could pose a risk to financial stability in the future if not regulated.
Crypto assets have come under scrutiny amid fears they could be used to circumvent financial sanctions imposed on Russia after its invasion of Ukraine.
“While cryptocurrencies are unlikely to be a possible way to circumvent large-scale sanctions today, the possibility of such behavior underscores the importance of innovation in cryptocurrencies, accompanied by an effective public policy framework to … maintain greater confidence and integrity in the financial system.” The Bank of England’s Financial Policy Committee (FPC) said Thursday in a statement https://www.bankofengland.co.uk/financial-stability-in-focus/2022/march-2022.
Cryptocurrencies such as bitcoin and ether are largely unregulated as they go beyond the regulatory “perimeter”, and to enforce them in full in the UK’s securities regulations will require a change in legislation being considered by the ministry. UK finance.
“This is likely to require expanding the role of existing macro- and micro-prudential regulators, regulators of market behavior and integrity, and close coordination between them,” the FPC said.
The FPC said the direct risks to financial stability from the crypt are currently limited, but if recent growth rates continue, there will be risks in the future.
The sector has grown tenfold globally from early 2020 to November 2021 and now accounts for $ 1.7 trillion or 0.4% of global financial assets, with more than 17,000 different cryptocurrency tokens in circulation.
Sector regulation should be based on “equivalence,” meaning that crypto-related financial services that perform a similar function to existing financial services should be subject to the same law, the FPC said.
Until cryptocurrencies are fully covered by the regulatory network, the Bank of England is focusing on controlling crypto risks in the banking sector. On Thursday, the Office of Financial Control told firms that they should fully explain to consumers the risks of unregulated cryptocurrencies.
Regulators around the world are also trying to combat cryptocurrencies and their offshoots.
CONDITIONS OF STABLE
Deputy Governor of the Bank of England Sam Woods wrote to creditors on Thursday https://www.bankofengland.co.uk/prudential-regulation/letter/2022/march/existing-or-planned-exposure-to-cryptoassests, noting the growing interest from banks and investment firms in the sector.
Woods told them that the risks associated with the crypto should be “fully taken into account” by bank boards, and they will likely need to adapt their existing risk management strategies and systems.
“We also expect firms to discuss the proposed prudential approach to cryptocurrency risk with their executives,” Woods said, referring to the amount of capital needed to cover any losses.
The Bank of England has launched a survey of existing bank risks and future cryptocurrencies, setting a deadline for responses by 3 June.
Stablecoins backed by assets or cash that have become systemically important should be backed by quality liquid assets and capital-absorbing losses similar to those of banks, the FPC said in a statement.
The use of deposits in commercial banks to secure stablecoins will pose significant risks to financial stability if carried out on a large scale, the FPC said.
The Bank of England and the Financial Control Authority will continue to work on rules for stablecoins and consult on a regulatory “model” for systemic stablecoins in 2023, according to the FPC. (Graphics: Bank of England Graphics at Stablecoins, https://fingfx.thomsonreuters.com/gfx/mkt/znpneqzdwvl/Bank%20of%20England%20Graphic%20on%20Stablecoins.PNG)
(Report by Hugh Jones and David Milliken; edited by Toby Chopra)