While speaking at a conference in Coventry, Sir Jon Cunliffe, the Deputy Governor of the Bank of England, weighed in on regulations for cryptocurrency. The official initially intended to speak about stablecoins and Central Bank Digital Currency (CBDC). Instead, he shared his thoughts on the broader crypto industry after recent events.
The most spectacular failure in crypto
Sir Cunliffe described the collapse of Bahamas-based crypto exchange FTX as “the most spectacular failure to date in the crypto ecosystem.” He expressed that centralized exchanges resemble conglomerates, as they spread conflict of interest between the primary entity and its associated firms. In this case, it was FTX and Alameda Research.
Sir Cunliffe said,
“Regulation imposes requirements and constraints on the connections between a financial firm and its affiliates, while also requiring controllers to be fit and proper. In this respect, transparency in corporate structures and the relationships between them is the key foundation.”
He argued that crypto exists in an unregulated space. Thus, it is vulnerable to risks that can be avoided by adopting regulations similar to companies operating in traditional finance.
The Deputy Governor clarified that he is not convinced whether software protocols on the blockchain will mitigate the risks that arise in lending, trading, and clearing unregulated services.
In the interest of financial stability, consumer protection, and responsible technological innovation, Sir Jon Cunliffe emphasized the need for proper regulation.
He stated that events like FTX’s implosion were one of the driving factors behind the central banks exploring alternative ways of crypto adoption. This included the issuance of a digitally native Pound sterling.
Crypto regulation in the UK
Deputy governor Cunliffe revealed that the Bank of England was working with the Financial Conduct Authority and His Majesty’s Treasury to set up a regulatory sandbox. Thus, developers will explore how the risks in this industry can achieve the level of expected assurance.
The Financial Services and Markets Bill, which is currently under review in UK’s Parliament, will take a look at the regulations surrounding payment systems using cryptocurrencies.