The implosion of cryptocurrency exchange FTX shows the need to bring the crypto world within the regulatory framework, Bank of England Deputy Governor Jon Cunliffe said on Monday.
FTX, which has filed for US bankruptcy court protection, has said it owes its 50 biggest creditors nearly $3.1 billion.
“While the crypto world, as was demonstrated during last year’s crypto winter and last week’s FTX implosion is not at present large enough or interconnected enough with mainstream finance to threaten the stability of the financial system, its links with mainstream finance have been developing rapidly,” Cunliffe said.
He added that FTX’s woes highlighted the need for regulators to put in place tighter controls as quickly as possible. It did not have a licence to operate in Britain, yet had caused waves.
“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,” Cunliffe told a Warwick Business School event.
Currently, crypto firms in Britain only have to show they can put in place sufficient controls to stop money-laundering, though many firms have had licence applications rejected by the UK’s Financial Conduct Authority (FCA).
Britain is approving a new financial services and markets law that will introduce regulation for stablecoins, a cryptoasset backed by an asset such as a currency and marketing of cryptoassets generally.
Cunliffe said that the BoE will set out a public consultation to flesh out rules for stablecoins in more detail and on how coinholders’ claims on the issuer and wallets should be structured to deliver redemption at par in line with commercial bank money.
“The FTX example underlines how important these aspects are,” Cunliffe said.
The finance ministry will also consult soon on extending the investor protection, market integrity and other regulatory frameworks that cover the promotion and trading of financial products to activities and entities involving crypto assets, he added.
Jane Moore, head of payments and digital assets at the FCA, said that crypto will, one way or another, shape the future of financial services and therefore consumer protection must be considered.
Separately, the BoE and finance ministry are looking at the potential for a digital pound.
Cunliffe said his initial view had been that FTX’s failure would have no implication on the potential timeframe for a digital currency. However, on reflection, he said that the interconnected nature of the digital world was relevant.
“Our aim is to ensure that innovation can take place but within a framework in which risks are properly managed,” Cunliffe said. “The events of last week provide a compelling demonstration of why that matters.”