February 3, 2023

Cryptocurrency trading is “too dangerous” to be left outside mainstream financial regulation and could pose “a systemic problem” without action, the Bank of England’s deputy governor warned.

For the first time since the founder of the crypto trading platform ftx was arrested and charged with massive fraud, Sir Jon Cunliffe told Sky News the couch is considering regulations to protect retail investors in the crypto trading “casino”, as well as the wider financial system, from potential crypto shocks.

Sam Bankman Fried used to be delivered on Wednesday from the Bahamas to the US, where he will appear before a New York court on eight counts of fraud, money laundering and campaign finance breaking.

The collapse of FTX prevented more than one million customers from withdrawing assets estimated at $8 billion.

Prosecutors allege that he used FTX’s clients’ money to cover losses in his private crypto hedge fund Alameda Capital in what the company’s new CEO told Congress was “old-fashioned embezzlement.”

An estimated 80,000 of FTX’s clients are based in the UK, with individual commitments of up to £5m in life savings according to a lawyer acting for dozens of victims.

Louise Abbott, a specialist in crypto fraud, told Sky News: “These individual investors have invested from a few thousand pounds to around £5 million, so huge amounts of money, all totally frozen, I’m going to use the word frozen rather than lost because hopefully something will be returned to them at some point. But this is a huge amount of money, a huge amount of money lost or stuck, or frozen in time.”

Crypto credibility

The episode is a huge blow to the credibility of cryptocurrencies, digital assets that derive their value not from state support, but from relative scarcity and the willingness of other investors to trade them.

Mr. Bankman-Fried had maintained contacts in Washington and on Wall Street, made millions of dollars in political donations and attracted high-profile investors to his platform.

His fall has highlighted the volatility of crypto investments and the lack of regulation in an industry that, despite widespread skepticism, is drawing increasing attention from the financial mainstream.

Attempts to regulate

In the UK, regulators have tried and failed to subpoena crypto exchanges based offshore, while the government has a target, set out in April by Rishi Sunak when he was chancellor, to make the UK a “global hub for crypto assets”, an ambition that depends largely on effective regulation.

Sir Jon, deputy governor with responsibility for financial stability, told Sky News that the bank’s regulatory efforts were aimed at protecting individuals and maintaining financial stability.

Bank of England Deputy Governor Jon Cunliffe speaks during the Bank of England Financial Stability Report at the Bank of England in Central London on June 27, 2017. / AFP PHOTO / POOL / Jonathan Brady (Photo credit must be JONATHAN BRADY/ AFP via Getty Images)
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Deputy Governor of the Bank of England Jon Cunliffe

“There has been a lot of activity over the past 10 years in terms of trading and selling crypto assets, assets without any intrinsic value, so they are incredibly volatile. And all of that has grown up outside of regulation,” he said.

“What we saw in FTX… is a number of activities that would have had certain protections in the regulated financial industry. We saw things like client money that seems to have disappeared, conflicts of interest between different operations, transparency, auditing and accounting” All maybe boring things that happened in the normal financial industry didn’t actually happen in that range of activities. And as a result, I think a lot of people have lost a lot of money.”

When comparing crypto trading to a casino, Sir Jon said that investors who want to speculate should be able to do so without the risk of losing access to their funds.

“It’s basically, in my opinion, a gamble, but we allow people to bet, so then if you want to get involved in that, you have to have the opportunity to play in a place that’s the same way regulated like when you gamble. in a casino it’s regulated. You have to have full information on the tin about what you’re doing.”

The bank must also address the risk to financial stability that can arise from digital assets as institutional investors and banks scrutinize exposure to an estimated $1 trillion in crypto assets.

“This crypto asset trade was not large enough to destabilize the financial system, but it started to develop links with the financial system,” said Sir Jon. “I don’t know how that will develop. But we had banks and investment funds and others willing to invest in it. I think we need to think about regulation before it gets integrated into the financial system and before we see a potential systemic problem.

“So I don’t think it’s going to be possible to say that this can just be kept out of the financial system. It’s too dangerous. I think it’s hard, but possible to say, let’s get it in, where and when we think we can.” managing the risk according to the standards we are used to.”

Potential for blockchain

While cryptocurrencies have proven to be consistently volatile since the introduction of Bitcoin 14 years ago, the underlying technology, blockchain, is believed to have significant potential across industries to manage data and accelerate and simplify transactions.

Blockchain provides evidence of transactions in a public record known as a distributed digital ledger.

Each new cryptocurrency exchange is registered on a “block” that is added to the “chain” with details of the new transaction and the previous transaction, meaning it can only be faked by changing all previous links.

The system is maintained and monitored by each computer connected to the network rather than a central control entity.

Mercedes is exploring blockchain’s potential to control the data that powers autonomous driving Vodafone examines its utility in managing the billions of microtransactions that will be enabled by the next generation of internet technology.

Smart money could also simplify global supply chains, with the prospect of linking microtransactions to individual components in manufacturing processes using stable tokens.

“There are technologies here that could be of real use, and I emphasize that they can really be used in the normal financial system, more efficient ways of doing things, potentially more resilient ways of doing things,” said Sir Jon.

“That hasn’t been proven in the crypto world. But if we could provide a regulatory space where people can see if they can develop products with it, we might be able to take advantage of some of those technologies.”

The Bank of England’s own digital currency

As part of this process, the Bank of England is advising on plans to develop its own central bank digital currency, an electronic version of the pound sterling that would offer the same security as a pound coin, but with the digital flexibility that cash could one day offer. money could replace.

“Physical cash will always be made available by the bank as long as people want it and a lot of people depend on it. But it’s not fully usable in the way we live now. So the question for the Bank of England is that, as the way how, as society changes and our lives become more digital, should we continue to provide money to the public usable for a range of transactions?

“This would be a digital equivalent of the ‘I promise to pay the bearer’ pledge, which ultimately underpins confidence in money in the UK. Whenever you want, you can convert that money you keep in the bank into into in fact Bank of England money backed by the state with that promise to pay the bearer.

“We want to make sure that as physical money becomes less useful in many parts of the economy, maybe we need to offer something digital to provide that underpinning.”

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