Banks

Crypto-assets represent “a risk” for the stability of the financial system, warns the Bank of England

It’s time to regulate crypto-assets in Europe and the United States. After a long period of observation and experimentation, the Bank of England (BoE) estimated on Thursday that the regulation of cryptocurrencies must be increased so that the recent growth of the sector does not turn into systemic risk.

The context in which these attempts at control take place is not insignificant. Since the post-Covid-19 recovery, developed economies have indeed faced rising prices, a trend reinforced by the war in Ukraine. In February, UK inflation accelerated to +6.2%, its highest level in 30 years. Therefore, many individuals are tempted to invest their savings in new values, such as crypto-assets.

The Bank of England, unlike its European counterpart the ECB, was also one of the first to raise its key rate to avoid any risk of hyper-inflation. The tone has therefore hardened vis-à-vis cryptocurrencies.

“The direct risks to the stability of the UK financial system created by crypto-assets and decentralized finance (DeFi) are limited for now”recognizes the central bank in its financial stability report.

But to add:

“But if the growth (of the sector) of recent years continues and these assets become more connected to the rest of the financial system, they would represent a risk”, she warns.

“The potential value of cryptoassets increased tenfold between early 2020 and November 2021, reaching $2.9 trillion at its highest“, estimates the institution. There are also more than 12,000 cryptocurrencies, developed on the blockchain allowing decentralized operation, according to CoinGecko.

“23% of European hedge funds”

The Bank of England, which like the other central banks is working on an MNBC (central bank digital currency) project, however, judges that with a decline to 1.7 trillion dollars in early March, the sector represents only 0.4% of assets. global financials.

“As of September 2021, 13% of US hedge funds and 23% of European hedge funds owned cryptoassets”even if these are probably investments in small amounts, specifies the BoE based on data published by the Fidelity fund.

The BoE specifies that this systemic risk is to be separated from the dangers for retail investors, which concerns more the policeman of the British markets (FCA), but the central bank seems ready to take on at least part of the role of regulator.

The same regulation as for finance

“The Financial Policy Committee (FPC) believes that where crypto technologies have a function similar to that of a traditional finance player, they should act within the framework of the regulations that currently exist, and the regulatory perimeter should be adapted. “details the BoE.

In France, this desire to align the rules of traditional finance with the world of cryptocurrencies regularly arouses the revolt of crypto-enthusiast communities. The latest at EU level is the EU Money Transfer Directive (Funds Transfer Regulations to reduce money laundering), voted last Thursday, and whose principle is to impose identity declarations for any crypto wallet holder (online or physical on a key), on the same principle of KYC applied to finance.

In the United Kingdom, this alignment would first concern stablecoins, that is to say a cryptocurrency backed by a currency, it should be regulated like a bank in the United Kingdom, and be accountable to the BoE.

For her part, the President of the European Central Bank (ECB), Christine Lagarde, warned on Tuesday about the “threatens“what represents the cryptocurrencies obtained in exchange for rubles in an attempt to circumvent the sanctions.

Across all digital asset classes, “crypto-assets concern me the most in the Russian context”she said.

(With AFP)

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