Bank of England to discuss regulating crypto with G20

The BoE has faced “challenges” in finding data on crypto holdings by institutional investors

Bank of England and Royal Exchange Building                                 
The BoE believes that the risk cryptos pose to the financial system is limited, however, the central bank wishes to know more about crypto assets growth – Photo: Alamy
                                

The Bank of England (BoE) will increase talks with its G20 counterparts in 2022 to discuss regulation surrounding crypto assets.

This is what Sarah Breeden, executive director for financial stability and risk at the BoE told The Times.

Breeden is also a member of the BoE’s Financial Policy Committee (FPC), which was set up in 2013 following the financial crisis of 2008 and “monitors and takes action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system”.

The BoE faced “challenges”

The BoE has experienced “challenges” in finding relevant data on crypto holdings by institutional investors and so international co-operation was needed in order to establish the size of investments by big companies.

Breeden said: “The ability to get data on what institutional investors are [holding] is a challenge. This is not something the UK can solve all on its own.”

The BoE needs to discuss the issues with the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system. The FSB was set up by the G20 at their London summit in 2009 and it includes all G20 economies.  

The G20 includes such nations as the US, Japan, China, India, the European Union (EU), Australia and the UK.  

Crypto risk limited but BoE wishes to know more

The BoE believes that the risk cryptos pose to the financial system is limited, however, the central bank wishes to know more about crypto assets growth.

Only a small amount of UK household wealth is currently held in cryptos – roughly 0.1%. This translates to 2.3 million people believed to own an average of £300 in digital assets.

Due to this small percentage, if the value of certain cryptos did fall to zero, it would impact individuals in a financially negative way but would not impact the economic system as a whole.   

“However, if somebody had borrowed money against that, or if some institutional investors are holding that in their portfolios, that’s when you can get the kind of knock-on effects that matter to us as the financial stability authority,” Breeden said.

“The closer those assets get to the core of the financial system, the more likely those knock-on effects are likely to be material,” she added.

This reflects what Sir Jon Cunliffe, deputy governor for financial stability at the BoE said last week.

“The UK central bank must be ready for the potential fallout cryptos could bring,” Cunliffe said.

The deputy governor was concerned over the point at which cryptos become integrated within the financial system, and then a big possible price correction having an impact on other markets and other established financial market players.

Cunliffe said he did not believe the UK has arrived at that point yet, but still the BoE needs to step up its work in this area “so that by the time this becomes a much bigger issue, we've actually got the regulatory framework to contain the risks”.

Market value around $2.6trn

 

The market value of cryptos has increased tenfold since 2020 to around $2.6trn (£1.97trn). Despite this, cryptos only equate to 1% of all global assets.

The majority of these cryptos are unbacked, so bitcoin (BTC) and other digital currencies have no underlying assets supporting them.

The Treasury is working with the Financial Conduct Authority (FCA) on what regulatory action is needed for BTC.

“We don’t have a regulatory framework that’s fit for crypto coins yet, but what we are doing is rolling our sleeves up and getting ready to build it,” added Breeden.

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