Bank of England wants stricter rules for crypto to avoid ‘systemic risk’

The Bank of England today called for better regulation of cryptocurrencies, pointing to “vulnerabilities” in the market.

In the Bank of England’s Financial Stability Report published Tuesday, said that “cryptoasset valuations have plummeted,” from a peak of nearly $3 trillion last year to the $883 billion it is today.

It said that while this destruction “posed no risks to financial stability in general”, stricter laws are needed to protect the wider financial system going forward.

“A number of vulnerabilities were exposed within crypto asset markets similar to those exposed by previous periods of instability in more traditional parts of the financial system,” the report said.

“These events did not pose a risk to financial stability in general. But, unless addressed, there would be systemic risks if crypto asset activity and interconnectedness with the wider financial system continued to evolve,” it added, noting that stricter law enforcement and regulation are needed.

The BoE has been talking a lot about cryptocurrency lately. In December it is warned that the industry could pose a threat to the established financial system.

But in April, the UK government announced plans to become a “global crypto asset technology hub” – using stablecoins “as a recognized form of payment”. The British central bank has since said that it would step in to direct and oversee collapsing stablecoins.

A stablecoin is a digital asset that is meant to be more stable than cryptocurrencies like Bitcoin or Ethereum, both of which fluctuate wildly up and down in price. Stablecoins, considered by many to be the backbone of the cryptocurrency ecosystem, are pegged to fiat currencies such as the US dollar to prevent fluctuations and help traders maintain liquidity. These coins maintain their pins in a variety of ways, with some like Tether and Circle’s USDC reportedly holding equivalent assets in reserve.

While arguably this year’s biggest crypto story yet the ignominious crash of the Terra ecosystem– a DeFi (decentralized finance) protocol that became virtually worthless within days when its stablecoin, an algorithmic coin that relied on code to keep its price stable, lost its peg and hit investors and the wider market hard.

In today’s report, the BoE again said such assets should be regulated. “In the absence of additional regulation, some stablecoins used for payments may not offer the same protection as central bank or commercial bank money,” it added.

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