Bank of England Says Crypto Could Destabilize Financial System

Jon Cunliffe, Deputy Governor of the Bank of England, recently argued why he thinks cryptocurrencies could cause a financial crisis. He compares it to the dot-com bubble and especially to the 2008 market collapse.

Crypto Weaves Itself into Financial Markets

As reported by Bloomberg, Cunliffe’s primary concern is that cryptocurrency has been interwoven into the financial system. As he points out, central banks are now offering crypto custody services to their clients.

Furthermore, hundreds of specialist crypto hedge funds are now, and top payment firms are experimenting with stablecoin settlement. Therefore, a sharp collapse in digital asset prices could leave lasting effects on the rest of the financial industry.

The total cryptocurrency market cap is already above $2 trillion. This is more than double its value at the start of the year. While small next to the total financial system, it’s well above the $1.2T sub-prime real estate market of 2008.

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Cunliffe says that its market space is more than enough to cause an economic catastrophe, as occurred 13 years ago.

“You don’t have to account for a large proportion of the financial sector to trigger financial stability problems. When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice.”

Cunliffe maintains that cryptocurrencies contain little intrinsic value. However, he recognizes that many people use crypto to transfer value without banks or custodians. With increasing use-cases and financial integration, he stresses the need for regulators to crack down on the industry.

Will Crypto Collapse?

Cunliffe isn’t the first to fear the crypto industry’s impact on the surrounding financial system. OCC Chief Michael Hsu made a similar comparison last month, comparing DeFi to credit-default swaps of the early 2000s. Also, he doesn’t see it as sustainable regardless of the unbelievably high returns some crypto lending institutions offer.

Gary Gensler– Chairman of the Securities and Exchange Commission– is also wary of an incoming implosion in the crypto space. Believing most cryptocurrencies to be securities, he stated that he wants to regulate it soon to avoid an inevitable “spill in aisle three.”

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However, his commission has been regretfully slow in doing so. For instance, a commissioner fired back at Gensler recently with criticisms of how he’s handled the situation so far.