The Bank of England released a report yesterday detailing the financial situation in the country, and it seems satisfied that cryptocurrencies do not pose a significant risk to England’s financial stability given their limited outreach in the financial sector. The bank said that crypto assets, despite growing significantly this year, only make up 1% of global financial assets, which limits risk exposure.
The report once again appears to green light cryptocurrencies from fears and aggression different regulators might have over cryptocurrencies in the region. It notes the benefits of having in place innovations like cryptocurrencies but in a safe framework.
“Innovation can bring a number of benefits, including reduced frictions and inefficiencies in financial services. These benefits can only be realized and innovation can only be sustainable if undertaken safely and accompanied by effective public policy frameworks that mitigate risks.”
The bank notes that the rapid growth of cryptocurrencies could mean increased financial risk to the entire financial system in the future. That is if they become more integrated into the fiat and legacy economic systems. For instance, it notes that around 95% of crypto assets are not backed by any underlying assets and therefore have no intrinsic value, meaning their price was prone to major fluctuations. This could mean that users of such assets are exposed to significant financial risks.
“For example, a large fall in crypto asset valuations may cause institutional investors to sell other financial assets and potentially transmit shocks through the financial system. The use of leverage can amplify such spillovers further.”
And for this reason, the Financial Policy Committee will remain vigilant of those potential risks to control them before they happen. The closest path towards limiting the financial system’s exposure to any financial risks from crypto would be to adopt a regulation for the industry, says the report.
“It takes time to develop regulatory standards. “We’ll need to make sure we have regulation in place before it becomes a problem.”
The Bank of England Governor Andrew Bailey urged banks and financial institutions to adopt a cautious approach towards adopting crypto-assets until a regulatory framework is in place.
The report says regulation can have benefits like boosting trust and integrity of cryptocurrencies in the financial system and further points to the possibility that the regulatory framework will not be about banning crypto altogether.
“Any future regulatory regime should aim to balance risk mitigation with supporting innovation and competition. The FPC considers that financial institutions should take an especially cautious and prudent approach to any adoption of these assets until such a regime is in place.”