The Bank of England has begun to formulate the UK’s first regulatory framework for cryptoassets, in a policy document.
The 39 page policy document by the Financial Policy Committee pointed out that while the cryptoasset sector remained small, its rapid growth could pose risks to financial stability in future if left unregulated.
It is fair to say the Bank of England so far has adopted a very cautious approach to anything crypto-related. As far back as 2014 for example the Bank of England warned that Bitcoin could pose a threat to financial stability should it see widespread adoption.
Then in May 2021 the governor of the Bank of England (BoE) Andrew Bailey, once again expressed his concern about digital currencies.
Andrew Bailey is well known for his reluctant stance on decentralised money, and he had a very blunt warning for people investing in cryptocurrencies. He said cryptocurrencies “have no intrinsic value” and people should only buy cryptocurrencies if they are prepared to lose all their money.
Weeks after that he said cryptocurrencies and similar assets were a danger to the general public.
That said, the UK and Bank of England in 2021 set up a taskforce after the Chancellor, Rishi Sunak had asked the bank to look at the case for a new “Britcoin”, or central bank-backed digital currency.
Against this backdrop comes the publication this week of the England of Bank’s first positioning on how it intends to regulate the market.
“Cryptoasset technology is creating new financial assets, and new means of intermediation,” noted the BoE’s Financial Policy Committee (FPC) on Thursday.
“Many services now facilitated by this technology mirror those available in the traditional financial sector, including lending, exchange, investment management and insurance,” the BoE said. “That activity is currently concentrated in cryptoassets, and is small compared to that of the overall financial sector.”
“However, if the pace of growth seen in recent years continues, interlinkages with the traditional financial sector are likely to increase,” said the BoE. “Moreover, the new technology has the potential to reshape activity currently taking place in the traditional financial sector, through either the migration of that activity or the widespread adoption of the technology.”
The BoE noted that cryptoassets, such as bitcoin and ether, are largely unregulated as they fall outside the regulatory ‘perimeter’ and a change of law would be needed to bring them under the full scope of UK securities rules, a step the HM Treasury is looking at.
The FPC said direct risks to financial stability from crypto were currently limited, but if the recent pace of growth is maintained, there would be risks in future.
Other countries, besides the UK, also have reservations concerning cryptocurrencies and crypto assets due to their extreme volatility and use by those seeking to avoid traditional financial rules and regulations.
But there are the odd exception.
The improvised country even said it intends to build a brand new city, financed by government Bitcoin bonds. The city would be built at the base of a volcano, where geothermal energy could be used to help power it.
But other countries have clamped down on crypto.
China for example, where many crypto miners used to be based, officially banned cryptocurrencies in 2019, but this year began taking much stronger measures against crypto transactions and mining activities.
Last September China’s central bank declared that it considers all cryptocurrency transactions “illegal”.
The US Treasury last year slapped cryptocurrency exchange Suex with sanctions for its alleged role in laundering ransomware payments.
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