According to Bank of England deputy Governor Sir Jon Cunliffe Cryptocurrencies require regulation because they are a “matter of urgent”
He said that crypto technologies are not a threat to financial stability right now.
However, there are good reasons to suspect that it might be different for a while longer than this, Sir Jon explained in a speech.
He warned that a future collapse of cryptocurrency could affect markets.
Investors who took on crypto-assets with brokers could be forced to seek cash for their debts.
He said that contagion could also be possible. A large drop in crypto valuations can affect investor sentiment more generally, leading investors to sell assets they consider risky or have an investor base similar to theirs.
He said, “Interconnectedness makes it possible that shocks can be transmitted through the financial systems.”
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In the past year, crypto-assets have grown around 200% in value from just under $800bn (£580bn) to $2.3tn (£1.7tn).
This is a small amount in comparison to the global $250tn financial system. However, it was the cause of 2008’s financial crisis. Sir John stated that the sub-prime industry was then valued at $1.2tn.
Many crypto-assets such as Bitcoin are not supported in real life by commodities or assets.
These strings are basically computer code and account for 95% of $2.3tn. They are therefore volatile.
As big banks, hedge funds, and investors become more involved in cryptocurrency, the connections between them and traditional finance systems are growing, Sir Jon explained.
He said, “Bringing crypto into the regulatory framework will ensure that there are potential very big benefits to the use of this technology in finance,” he continued.