The Bank of England has stated in its Financial Stability Report that cryptocurrencies may pose a threat to financial stability if they continue to be integrated into the mainstream financial system without due diligence.
The Bank of England report was released by the Financial Policy Committee (FPC) on July 5, 2022. In the document, it is pointed out that the war between Ukraine and Russia, the problems of the chain of supply and tighter monetary policies are affecting households and businesses in the UK.
In addition, according to the financial institution, the prices of riskier assets, including cryptocurrencies, have fallen worryingly and “could continue to do so“.
Additionally, the report noted that liquidity issues such as those featured in Celsius Network, the unwinding of leveraged positions and the collapse of the stablecoin TerraUSD, were “vulnerabilities exposed” of cryptocurrencies, while recognizing that these vulnerabilities have not had a drastic impact on financial stability in the United Kingdom.
However, according to the report, an integration between cryptocurrencies and traditional finance could pose financial risks if allowed to continue unchecked.
“These developments did not present any risks for financial stability as a whole. But, if left unchecked, systemic risks will emerge if crypto-asset activity, and its interconnection with the broader financial system, continues to expand.” The report details. “This underscores the need for improved regulatory and enforcement frameworks to deal with the evolution of these markets and activities.“, she adds.
Due to these factors, in the report, the CPE called for a “rapid development” regulatory frameworks to deal with the development of the cryptocurrency ecosystem.
Cryptocurrencies are gaining more and more acceptance in the UK, but they are coming under intense scrutiny.
The FPC also reiterated that it expects stablecoins to be able to function normally in the UK, as long as they are overseen by regulators. It will therefore conduct a consultation on a regulatory proposal to allow the use of stablecoins as a means of payment in the United Kingdom.
“The Treasury has published its proposed regulatory framework for stablecoins used as means of payment in the UK. Which, in turn, proposes the inclusion of stablecoins in the payment jurisdiction of central banks.” The report says.
It should be noted that Brexit has allowed the UK to decouple from EU laws, giving it some freedom to develop its own regulations. This is why the Financial Conduct Authority (FCA) of the United Kingdom, has implemented many restrictions on cryptocurrencies based on anti-money laundering laws.
To date, only 35 cryptocurrency companies are legally authorized by the FCA to offer cryptocurrency services to UK citizens.
In April, Chancellor of the Exchequer Rishi Sunak expressed his desire to make the UK a “cryptocurrency hub“.
“I want to make the UK a global center for cryptocurrencies. This is why we want to help companies invest, innovate and develop in this country.” expressed Rishi Sunak, in a statement.
However, the FCA pointed out that it would take time to prepare oversight of cryptocurrency issuers and traders so that investors are “adequately protected“.