UK: Bank Of England Deputy Governor Describes Financial Stability Risks Of Crypto

Bank of England Deputy Governor for Financial Stability Jon Cunliffe described risks to financial stability from rapid crypto industry growth.

In a speech at a business forum organized by SWIFT, a provider of secure financial messaging services, the Deputy Governor raised regulatory concerns about vulnerability due to price volatility, lack of creditworthiness and liquidity standards for stablecoins, and the inability to identify owners or points of contact in decentralized finance.

Mr. Cunliffe highlighted the following concerns:

• Cryptoassets. Mr. Cunliffe said that unbacked cryptoassets constitute nearly 96 percent of the cryptoasset industry, meaning that the industry is overwhelmingly vulnerable to price volatility. He stated that regulatory authorities must ensure that the financial system can absorb the effects of major price corrections. Mr. Cunliffe pointed out the damage caused by the recent Archegos incident as an example of the implications of the growing interconnectedness of the financial system and unbacked cryptoassets.
• Stablecoins. Mr. Cunliffe argued that stablecoin arrangements that settle payments must show that their asset backing meets the same creditworthiness and liquidity standards that are met by real money in existing systemic payment systems. He noted recent guidance by the Committee on Payments and Market Infrastructures and IOSCO that confirms international standards are applicable to systemic or soon-to-be systemic stablecoin arrangements. He also emphasized that stablecoin arrangements must be regulated by at least one discrete legal entity that is accountable for the arrangement's operation and risk management.
• Decentralized Finance (or "DeFi"). Mr. Cunliffe stressed that the varying degrees of decentralization pose significant regulatory issues, particularly if a platform has no identifiable owner or point of contact.

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