The Bank of England deemed the collapse of the cryptocurrency market a "plausible scenario" and pointed to the need for an "urgent" regulatory framework for digital assets. This was stated by the regulator's deputy head John Cunliffe.
The official described the risks posed by cryptocurrencies as "limited" to financial stability. At the same time, he noted their growing interconnectedness with the traditional sector.
"Regulators at the international and national level have set to work. This needs to be done as a matter of urgency," Cunliffe said.
The Bank of England spokesman estimated that the cryptocurrency market had grown by 200% to $2.3 trillion in 2021. 95% of cryptocurrencies, including bitcoin, are not backed by fiat or other assets, according to Cunliffe.
"The financial crisis in 2008 triggered a $1.2 trillion subprime segment. The collapse of the cryptocurrency market is definitely a possible scenario given the lack of intrinsic value, volatility, high correlation between assets, cyber and operational vulnerabilities and of course the power of herd behaviour," he listed.
The links between cryptocurrencies and the traditional financial system are growing as big investors, hedge funds and banks become increasingly involved in the space, the central bank spokesman said.
The unregulated DeFi sector presents "obvious" problems given the lack of investor protection. The Bank of England has begun work to manage such risks, Cunliffe added.
"Effectively embedding cryptocurrencies within the regulatory perimeter will provide assurance that society will benefit greatly from this technology," he concluded.
Recall that in October, Cunliffe, in his role as head of the Bank for International Settlements' payments and market infrastructure committee, presented a report with guidance on the compliance of stablcoin mechanisms with international standards for payment, clearing and settlement systems.