The Bank of England is leaning towards the regulation of cryptocurrency, following the recent collapse of the digital currency exchange FTX.
Deputy Bank Governor Sir Jon Cunliffe said the collapse had reinforced the need to regulate crypto to safeguard the financial system.
During a speech, Cunliffe said that the UK should bring cryptocurrency within the scope of financial services regulation to protect consumers and prevent a potential “crypto shock”.
The comments follow the recent collapse of FTX after allegations it had mishandled customer deposits. Only weeks earlier, investors valued the Bahamas-based exchange at $32 billion.
It had an $8 billion black hole in its accounts when filing for bankruptcy a fortnight ago.
Sir Jon said those who invested through regulated digital currency exchanges should be able to expect the “protections that they would get in conventional finance”.
He said the failure of FTX was “not at present large enough… to threaten the stability of the financial system”, but that future crashes could have broader impacts.
He added: “We should not wait until it is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact.”
According to Cunliffe, the collapse of FTX will not stop the Bank of England’s project to create a Central Bank Digital Currency, which will run alongside Pound Sterling.
Sir Jon explained his initial reaction to news of the collapse: there was “really no connection between FTX and our work.”
The Bank of England and the Financial Conduct Authority (FCA) intend to continue with their plans to regulate more digital assets, including so-called stablecoins that attempt to link their price to real currencies.
He said the regulation would ensure stablecoins “meet standards equivalent to those expected of commercial bank money”. If required, the coins should be set up so the issuer can meet redemptions in cash.
He added the failure of FTX would not halt experiments with introducing so-called “decentralised contracts” into financial markets, although these remain at an early stage. These contracts are based on “blockchain” technology, a digital ledger, and can be programmed to automatically complete, speeding up transactions.
Regulators are facing questions about whether they should have taken more action ahead of the collapse of FTX, especially in the US, where the exchange acted as a potent lobbying force.
FTX was never regulated in the UK, and the FCA issued a warning in September that customers could lose all of their money if they used the exchange.
