The Bank of England’s Deputy Governor for Financial Stability, Sir Jon Cunliffe, spoke at the Wall Street Journal’s “Future of Everything” event yesterday. In the wake of extreme volatility in cryptocurrency markets, including the collapse of $LUNA, Cunliffe expressed scepticism over the usefulness and value of digital assets.
Cunliffe stated that “the technological developments that have been around crypto,” such as blockchain or distributed ledger technology, can offer “large benefits” – but argued that digital assets themselves have “no intrinsic value.” Because of this, valuations “move with sentiment” and are based on nothing more meaningful than simply “what people want to pay for them” at any given moment, Cunliffe said. “[That’s why] they’ve gone up in price and they’ve gone down in price.”
With financial conditions tightening, and major central banks moving to put up interest rates, Cunliffe believes cryptos are being seen increasingly as “a risky asset.” Most consumers investing in crypto, Cunliffe suggested, do so for speculative reasons. With incomes squeezed as a result of inflation, they may not be as prepared to take that risk.
The Bank of England Deputy Governor also argued that most retail investors do not fully understand the product they are investing in. He accepted that a few major players, such as “crypto hedge funds […] or traditional hedge funds who’ve got some crypto as a speculative investment [as a small percentage of] their portfolio,” are able to navigate digital asset markets confidently. But he asked: “retail investors who’ve invested in cryptoasset, do they understand what they’ve invested in? […] I’m not sure that they do.” He suggested consumer protection regulation, related to the crypto space, may be required:
However, Cunliffe does not believe that volatility in crypto markets poses any wider risks to the financial system – yet. Addressing the rapid demise of the $LUNA coin, he said the Bank of England had noticed “some contagion” but that had only affected “the price of [other] cryptoassets.” While links between the “crypto financial world” and the “non-crypto financial world” are growing, they are “not developed enough to have that contagion moving through to conventional finance.”
That said, if a similar episode played out “in two years’ time or three years’ time […] it could be a different story.” This would ultimately mean crypto volatility becoming a systemic risk to financial stability.
The collapse of $LUNA was caused by the stablecoin $UST failing to maintain its peg. Theoretically, $UST deployed a complex algorithm to control supply and, through this, ensure its value always equated to $1. Cunliffe suggested that this failure raises wider questions about stablecoins.
Advocates of stablecoins “need to think quite carefully about whether you’re stable just because you say you are,” Cunliffe stated. He argued that more work needs to be done on looking at whether the underlying assets of stablecoins are sound, and able to maintain pegs. Cunliffe also suggested that more preparation should be done so that stablecoins are able to overcome any future crises of this kind. On a wider level, he said that the $LUNA episode shows that “if this world is to develop […] it needs to happen within a regulated space.”
Cunliffe’s comments will likely fuel speculation that the Bank of England is due to introduce further guidelines on the use and regulation of digital assets. Doing so will be crucial, according to Cunliffe, is the central bank is to protect consumers and wider financial stability.
Author: Harry Clynch
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