Jon Cunliffe, Deputy Governor of the Bank of England in Financial Stability, has warned of possible repercussions. He shared that cryptocurrencies could lead to a global financial crisis with strict regulations.
In his speech, Cunliffe highlighted the growth rate of the cryptocurrency market from $16 billion 5 years ago to $2.3 trillion today.
Jon pointed out that when something in a financial system grows too fast and happens mainly in an unregulated space, financial stability authorities need to be aware of these circumstances.
According to Cunliffe, governments and regulators must be careful to follow the golden mean. Jon also noted that cryptocurrencies offer the prospect of a radical improvement in financial services.
Although the risks to financial stability are limited at this stage, the current use of cryptocurrencies contributes to financial stability, as most have no intrinsic value and are therefore vulnerable to significant price adjustments.
Bitcoin and Ethereum, the two largest cryptocurrencies, fell more than 30% in value before recovering earlier this year and have been highly volatile since their inception. Prices are sensitive to various external factors. Moreover, they became influenced by the Chinese government regulatory pressure, the pandemic, comments by Tesla CEO Elon Musk, etc.
According to Jon, the crypto world is starting to connect with the traditional financial system, and players are slowly emerging. Most importantly, it takes place in a largely unregulated space.
His comments mirrored the announcement made by Bank of England Governor Andrew Bailey in May. He advised cryptocurrency investors to adapt to lose all their money due to the miss of intrinsic value of their assets.
The UK Financial Conduct Authority pointed to the risky nature of crypto investments. According to Cunliffe, if the market continues to expand at this pace, the risk of financial stability may increase rapidly; However, the extent of these dangers is determined by the acceleration governments and regulators respond.
The question at this stage is what could lead to such events if these cryptocurrencies continue to grow. Will they become more integrated into the traditional financial sector, and will investment strategies become more complex again?
Jon said increasing risk management and provision would depend on the government to make the system resilient to significant adjustments. While crypto financing works in a new way, well-designed standards should ensure risk management in the crypto world just as it does in traditional finance.
Many regulators worldwide have already started to create a public policy framework that will enable the exponential growth of cryptocurrencies. However, it is better to implement the processes to make them happen faster.