The Capital
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The Capital

A Bank of England official warns that cryptocurrency might trigger a financial crisis similar to that of 2008

Bank of England

Bank of England official warns that cryptocurrency might trigger a financial crisis similar to that of 2008.

After five years, the cryptoasset market has grown from $16 billion to $2.3 trillion, like the subprime mortgage market in 2008, Cunliffe said Wednesday in a speech.

Regulations throughout the world are working to build a public policy framework to govern cryptoassets’ exponential expansion, but Cunliffe said this must be pushed urgently.

Source: Unsplash

According to Jon Cunliffe, the Bank of England’s deputy governor for financial stability, cryptocurrencies could cause a global financial disaster unless strict controls are implemented.

After five years, the cryptoasset market has grown from $16 billion to $2.3 trillion, like the subprime mortgage market in 2008, Cunliffe said Wednesday in a speech.

When something is emerging rapidly and mostly unregulated in the financial system, financial stability authorities must be aware of it,” he stated.

Governments and regulators must be careful not to overreact or categorize new techniques as “hazardous” merely because they are different, and Cunliffe emphasized that crypto technologies provide a chance for “dramatic advances” in financial services.

According to him, the current use of cryptoassets poses a danger to financial stability because most “have no inherent value and are prone to severe price corrections,” despite the fact that financial stability threats are currently limited.

It has been a roller coaster ride for the world’s two most popular cryptocurrencies, Bitcoin and Ethereum since they were launched in 2013. Prices can be influenced by a wide range of external factors, from Elon Musk’s tweets to Chinese government regulation.

“We are seeing the rise of leveraged actors in the crypto realm as it begins to connect to the traditional financial system. Also significantly, this is taking place in a completely uncontrolled environment,” Cunliffe said.

In May, Bank of England Governor Andrew Bailey warned cryptocurrency investors that they could lose all of their money owing to the lack of “intrinsic value” in the assets. His words reflect those.

Investors in cryptocurrency have been cautioned against taking on too much risk by the Financial Conduct Authority (FCA) in the United Kingdom.
There is a risk to financial stability if the market continues to grow at such a rapid pace, but regulators and governments will assess the magnitude of that risk.

According to him, the price of bitcoin has decreased by 10% in a single day roughly 30 times in the past five years, the largest of which being a 40% drop after a cyber-incident at Seychelles-based BitMEX.

“What could happen if these cryptoassets continue to grow in scale, if they continue to be more integrated into the traditional financial system, and if investment techniques continue to get more complex?” Cunliffe said this.

Cunliffe suggested that interconnection and leverage are critical to whether big price corrections can be absorbed by the system, leaving some investors with severe losses but avoiding a knock-on impact on the actual economy.

Foreshadowing the 2008 financial crisis, Cunliffe noted that both of these were present in the subprime mortgage market, permitting the chain reaction that ultimately brought the global economy to its knees. He stated that authorities will have to deal with this increased risk and ensure that the system is able to withstand substantial changes.

A well-designed set of standards and regulations could and should allow risks to be managed in the crypto world in the same manner that risks are managed in the traditional finance industry, Cunliffe added.

However, Cunliffe urged regulators throughout the world to pursue this urgently, citing the exponential growth of cryptoassets as an example of why this must be done now.

Technology and innovation have led to improvements in finance worldwide, he said: ‘If you make a better mousetrap, the world will come to your door’.

Technology and innovation have led to improvements in finance worldwide, he said: ‘If you make a better mousetrap, the world will come to your door’.
What’s more, “it must be a truly better trap rather than one that simply functions to lower — or to no standards at all.

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