The Bank of England called on policymakers to beef up the global framework for regulating cryptocurrencies to prevent them from threatening the wider stability of financial markets.
The U.K. central bank’s Financial Policy Committee suggested the role of prudential and market integrity regulators should be expanded and their coordination increased.
The remarks reflect concern that the $1.7 trillion crypto market is now big enough that it could unsettle the broader financial system in times of strain. It's larger than the $1.2 trillion market of subprime mortgages, which triggered a global crisis more than a decade ago.
“Enhanced regulatory and law enforcement frameworks are needed, both domestically and at a global level,” the BOE committee said in minutes of its meetings on March 9 and March 18, which were released on Thursday.
The BOE’s committee will make recommendations to the U.K. Treasury on adapting the remit for supervising such assets, many of which are beyond the scope of the Financial Conduct Authority. BOE Deputy Governor Sam Woods has also written to banks warning them that the longer-term treatment of the assets is likely to differ from the current framework.
In a letter to chief executives, Woods noted the “increased interest” from banks and investment firms in entering various crypto markets. He reiterated that the appropriate capital requirement to shore up such activity is 100%, despite the same figure receiving widespread criticism from banks when suggested by the Basel Committee on Banking Supervision last summer.
While the direct risk to the U.K. financial system is limited for now, stability risks may emerge if the pace of growth continues and the assets become more entrenched in the wider system, the BOE said. For now crypto is still a drop in the water in the $469 trillion global financial system, making up just 0.4% of the total amount, according to the BOE. However, BOE officials have been building the case for regulation for some time.
“You don’t have to account for a large proportion of the financial sector to trigger financial stability problems,” BOE Deputy Governor Jon Cunliffe said in a speech in October. “When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice.”
He noted that major banks are providing custody services for crypto assets and 200 specialist hedge funds have sprung up to invest in the sector.
— With assistance from Marion Dakers and Emily Nicolle.
