Jon Cunliffe has spoken of the potential risks to financial stability of crypto assets such as bitcoin and stablecoins. Crypto assets have grown by 200% in 2021 alone. Mr Cunliffe feels that they have the potential to be very good for the financial markets and there are currently no significant risks to financial stability. However, the risks could increase very fast, and how this happens will in no small measure be due to the regulatory response to their increased popularity.
He looked at the key distinction between unbacked cryptoassets that are primarily used for speculation and backed cryptoassets used for payment. While unbacked assets are by their very nature volatile, many investors increasingly view them as an acceptable alternative to traditional investment, and there is increasing interest from professional investors and the wholesale markets. Looking forward at the risks, he said that investors losing money does not of itself create financial stability risks, although it would of course concern regulators. The key worry is what would happen in the event of a dramatic price drop, which is a very plausible scenario.
Backed crypto assets are currently far smaller in terms of market segment, although growing, and with ever increasing technological variations. Their characteristics mean they cannot be treated the same way as traditional payment and settlement systems, but regulation can play a role. Mr Cunliffe commented the CPMI-IOSCO draft guidance.
Finally, he spoke of the risks of decentralised finance, which is a growing sector he described as opaque, complex, and carrying on activities within the regulated financial sector. Although in its infancy, regulators are already concerned about the risks it poses.