Britain’s apex bank, the Bank of England, through the Prudential Regulation Authority (PRA), is looking to raise as much as 321 million pounds ($419 million) from the commercial institutions it is regulating as it is planning to shore up its regulatory efforts in the digital currency ecosystem.
With the proposed funds it hopes to raise projected to be 8% above what was pulled by the PRA in 2021, the Bank of England is looking to onboard as many as 100 staff that will help chart its regulatory agenda for the nascent industry moving forward.
The digital currency ecosystem is worth more than $2 trillion at its peak, a figure that is no longer negligible. Despite the fact that this figure is just a fraction of the $469 trillion global financial systems, officials of the Bank of England believe the industry is large enough to upset the financial industry, the way the Mortgage industry did when it ushered in the global financial crisis of 2008.
In addition to the plans of the PRA as detailed in its business plans, it plans to “ask firms to report their crypto-asset exposures, treatments, and future investment plans” to help establish a common international framework for digital currencies.
From its regulatory actions, the Bank of England has a very dominant stance concerning the regulation of cryptocurrencies. In September 2020, the Governor of the BoE, Andrew Bailey, recognised the importance of stablecoins in the monetary ecosystem, adding that Bitcoin has no connections to money.
In its own way of identifying more with the evolution of money, the Bank of England is developing its own Central Bank Digital Currency (CBDC) or Digital Pound. With the growing number of crypto users being recorded in the United Kingdom, stepping up its regulatory moves is a good way for the BoE to register its interest in a more coordinated effort with other regulators in the world as it concerns the developing crypto world.
The Bank of England, the Central Bank of the United Kingdom, announced Thursday the first regulatory framework for crypto assets in the country. The UK Central Bank made a move as it admitted that though the crypto sector remained small, its rapid growth could pose risks to financial stability in future if it remains unregulated.
Of late, crypto coins have come under the regulatory spotlight amid concerns they can be used to circumvent financial sanctions imposed on Russia since its invasion of Ukraine.
In a statement on Thursday, the Central Bank’s Financial Policy Committee (FPC) stated: “While crypto assets are unlikely to provide a feasible way to circumvent sanctions at scale currently, the possibility of such behaviour underscores the importance of ensuring innovation in crypto assets is accompanied by effective public policy frameworks to… maintain broader trust and integrity in the financial system.”
The Financial Policy Committee said that although direct risks to financial stability from cryptocurrency are currently limited, if the recent growth continues, there would be risks in the future. The committee admitted that crypto-assets like Bitcoin and Ether are largely unregulated as they fall outside the setout regulatory scope. However, the committee now considers a change of law to be made to bring cryptocurrencies inside the full scope of UK securities rules.
According to the FPC, regulation for the crypto sector should be based on “equivalence”. This means that crypto-related financial services that function similarly to the existing traditional financial services should be subjected to the same laws.
The FPC further stated that setting up such a regulatory framework would help mitigate risk associated with stablecoins that do not have a deposit guarantee scheme or regime for winding themselves down if in trouble.
The FPC disclosed that the Central Bank and Financial Conduct Authority (FCA) will conduct further tasks on rules for stablecoins and consult on a regulatory “model” for systemic stablecoins in 2023.
While the UK Central Bank is working on bringing cryptocurrencies fully under the regulatory framework, the regulator has been focusing on ensuring that risks from crypto-assets are controlled in the banking sector.
On Thursday, Sam Woods, the Deputy Governor at the Bank of England, wrote to local lenders about banks and investment firms’ rising interest in offering crypto trading services.
Woods told lenders that the boards of banks should fully consider risks from crypto-assets and therefore adapt their existing risk management strategies and systems. “We would also expect firms to discuss the proposed prudential treatment of crypto-asset exposures with their supervisors,” Woods said in reference to the amount of capital required to cover any losses.
The Central Bank considering CBDC
This is not the first time the UK Central Bank has warned on cryptocurrency risks. Late last year, a senior Bank of England official warned that fast-growing crypto-currency assets could pose a danger to the established financial system. In December, Sir Jon Cunliffe, the Deputy Bank Governor, said that although not much of UK households’ wealth is currently held in assets like Bitcoin, they are becoming more mainstream. The executive emphasized that cryptocurrencies had been “growing very fast”, with people like fund managers wanting to know whether they should hold part of their portfolios in crypto assets.
When cryptocurrency becomes integrated into the financial system, a major worry is that big price correction could significantly affect other markets and affect established financial market participants. Mr. Cunliffe, therefore, urged authorities to beef up measures and get a regulatory framework in place to contain the crypto risks.
One of the counters that the Bank of England has taken is to embark on research and exploration for a potential launch of its own cryptocurrency (a central bank-backed digital currency) to tackle some of the challenges posed by cryptocurrencies such as Bitcoin.
According to Bloomberg, the Bank of England (BOE) intends to tighten regulation of cryptocurrencies for the global frameworks, preventing from harming its financial stability.
The current size of the crypto-asset market has grown by more than ten times from $0.13 trillion since January 2019. According to CoinGecko, the value of the cryptocurrency market was back at $2 trillion as of 10:15 a.m. ET on March 3. The total cryptocurrency market value is still below the $3 trillion since four months ago.
With many assets outside the scope of the Financial Conduct Authority (FCA), the Bank of England suggested expanding the role of the prudential and market integrity regulator to coordinate and cooperate with each other in regulating crypto assets, according to minutes of the BoE meeting released Thursday.
the BOE committee said that:
“Enhanced regulatory and law enforcement frameworks are needed, both domestically and at a global level,”
In addition to this, the BoE also stated that while the immediate risks to the UK financial system are limited, there may be financial stability risks if the pace of growth in crypto assets continues.
According to the British politician who served as Chancellor of the Exchequer from 2016 to 2019 – Philip Hammond – digital assets could ease the post-Brexit financial disruption, which the UK is passing through. If London does not take the cryptocurrency industry seriously, it risks being surpassed by its European competitors, he added.
‘We Need to Move Quickly And Effectively’
In a recentinterviewwith City A.M., the former member of the Conservative Party – Philip Hammond – opined that the UK should move its focus from Brexit to digital currencies. By doing so, the kingdom could secure its financial status since bitcoin, and the altcoins will become more and more employed on a macroeconomic level:
“I personally think the momentum is now unstoppable. We need to move quickly and effectively to secure London’s position.”
Hammond warned that ignoring the asset class is not wise as many European nations have begun embracing them. He added that some of those competitors view cryptocurrencies as an opportunity to overtake the UK as a world financial services hub:
“If we don’t watch carefully we will find some surprising people are ahead of us.”
Speaking of “surprising” countries with a friendly stance on the cryptocurrency industry, the small British Overseas Territory of Gibraltar is worth mentioning.
It has a comprehensive regulatory framework, which has attracted many companies operating in the field. One of the examples is the Chinese crypto giant – Huobi – which recently showed intentions to move its spot-trading operations to Gibraltar.
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As for the regulation topic, Hammond regretted that the UK authorities neglected the cryptocurrency sector. He predicted that blockchain technology – the backbone of digital assets – would underpin a future trading system. As such, British watchdogs should take the matter more seriously:
“Regulators have been heavily distracted. We need to move pretty quickly to show that this technology is recognized and accepted by legislators and regulators in the UK.”
Philip Hammond, Source: Wikipedia
Bank of England Is Not a Crypto Fan
The United Kingdom does not seem to provide the friendliest environment for cryptocurrencies since the nation’s central bank – the Bank of England – is a huge critic.
In May this year, Andrew Bailey – the institution’s Governor – argued that bitcoin and the other digital currencies ”have no intrinsic value,” and individuals who invest in them should be extra cautious.
Earlier this month, Jon Cunliffe – Deputy Governor at the Bank of England – reiterated the negative stance saying that the volatility of the market could start to spill over into traditional financial markets.
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The Bank of England is not a fan of bitcoin nor its growing adoption in countries like El Salvador. The Governor – Andrew Bailey – has repeatedly expressed his “concerns,” but this time, El Salvador’s President Nayib Bukele issued a response.
BOE “Concerned” About El Salvador and Bitcoin
Ever since the small Central American nation outlined plans to adopt bitcoin as legal tender in June 2021, numerous global financial organizations have tried to warn the country not to do it. Apart from the IMF, the Bank of England, spearheaded by BTC critic Andrew Bailey, was the most vocal one.
The institution has used almost every opportunity since then to double down on its belief that El Salvador should use only fiat money. The latest such example came earlier this week, shortly after the country’s leader – President Nayib Bukele – announced plans to build a Bitcoin City.
As reported by Bloomberg, Bailey touched upon the infamous volatility, similarly to most other bashers:
“It concerns me that a country would choose it as its national currency. What would worry me most of all is, do the citizens of El Salvador understand the nature and volatility of the currency they have.”
Andrew Bailey. Source: Bloomberg
Bukele Responds
Although it has been just a few months since El Salvador legalized BTC, the experiment seems to be working just fine for the country, at least according to the frequent updates published by President Bukele or people from his administration.
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For instance, the nation has used the aforementioned volatility, especially when the price dips, to accumulate more portions of the asset and to use the profits when the price increases to make plans for buying pet hospitals or new schools.
While addressing Bailey’s most recent comments, President Bukele responded in a somewhat ironic fashion, especially about the “genuine” concerns that the BOE has for the people of El Salvador:
“Bank of England is “worried about El Salvador’s adoption of Bitcoin? Really?
I guess Bank of England’s interest in the well-being of our people is genuine. Right?
I mean, they have always cared about our people. Always.
Gotta love Bank of England.”
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Bank of England governor Andrew Bailey has expressed concerns over El Salvador’s adoption of Bitcoin (BTC) as legal tender after President Nayib Bukele announced the launch of Bitcoin City.
Bailey argued that El Salvador’s decision to adopt Bitcoin as a currency was alarming because consumers are likely to suffer from the cryptocurrency’s extreme volatility.
Trading around $43,000 on the first day of El Salvador’s Bitcoin adoption as legal tender, Bitcoin surged to a new historical high above $68,000 on Nov. 9. BTC price has significantly tumbled since then, with Bitcoin trading at $54,626 at the time of writing.
Bitcoin 90-day price chart. Source: CoinGecko
“It concerns me that a country would choose it as its national currency,” Bailey said at the Cambridge University student union appearance, Bloomberg reported Nov. 25.
The governor also questioned whether El Salvador citizens understand the nature and the volatility of Bitcoin at all, which causes his biggest concern.
Bailey also cited a new statement on El Salvador by the International Monetary Fund (IMF), which is responsible for tracking risks to global financial systems. Issued on Monday, the statement outlines “significant risks” arising from Bitcoin as a legal tender and Bitcoin trading in El Salvador.
The IMF previously issued a warning against El Salvador’s Bitcoin Law in June, which didn’t prevent the country from adopting it and accepting BTC as legal tender in September. Bailey added that the BoE is studying whether to launch a central bank digital currency (CBDC), stating:
“There is a strong case for digital currencies, but in our view, it has to be stable, particularly if it’s being used for payments. That is not true for crypto assets.”
Related:El Salvador’s dollar debt dives on Bitcoin bond plans
The news comes shortly after BoE deputy governor for financial stability Sir Jon Cunliffe declared that CBDCs are a “revolution in the functionality of money driven by technology.” On the other hand, the majority of the British adult population were skeptical and concerned about a potential CBDC adoption in an August survey by Redfield & Wilton Strategies.
In an event streamed live on Wednesday, Bank of England governor Andrew Bailey and deputy governor for financial stability Sir Jon Cunliffe answer questions from lawmakers from the Economic Affairs Committee. When asked about the growth of innovation surrounding digital currencies in the country, Sir Cunliffe gave the following comment:
It’s quite difficult to predict how innovators will take money and actually use money going forward. But we are starting to see programmable money being used in the crypto world. And I would expect we would see a similar revolution in the functionality of money driven by technology.
Sir Jon Cunliffe discussing CBDCs | Source: Parliamentlive.tv
The Bank of England is currently exploring options to implement a digital pound CBDC for retail payments. A task force behind the CBDC is also investigating the use of a digital pound for distributing payrolls, pensions, etc.
In supporting the initiative, Sir Cunliffe cites the rapidly declining use of cash in the United Kingdom in recent years — which was greatly accelerated by the advent of the COVID-19 pandemic that discouraged physical contact in transactions. An estimated 30% of transactions in the country now occur via e-commerce.
When asked about the potential demand of a digital pound CBDC, Sir Cunliffe said:
“We’ve modeled a very prudent assumption, which is that basically 20% of [household and corporate transactional] deposits based in the banking system could move out of the banking system and into central bank digital money.”
Nevertheless, Sir Cunliffe admitted that the current state of crypto affairs could potentially threaten financial stability within the country. The market cap of cryoptocurrencies has surged to $2.6 trillion in a very short period of time, with an estimated 95% of digital assets being unbanked and 5% consisting of stablecoins. On the opposite side of the Atlantic, the United States has less of a positive outlook on CBDCs, saying that regulated stablecoins designed by the private sector make them redundant.
Sir Jon Cunliffe, the Deputy Governor for Financial Stability at the Bank of England (BoE) crypto may pose an imminent threat to the traditional financial system.
During a Nov. 15 interview with the BBC’s “Today” program, Cunliffe argued that the rapid growth of digital assets and their integration with traditional financial services could soon pose systemic risks, stating:
“[Cryptocurrencies] are growing very fast, and they’re becoming integrated more into what I might call the traditional financial system.”
“So the point at which they pose a risk is getting closer. I think regulators and legislators need to think very hard about that,” he added.
While Cunliffe warned of integrating volatile crypto assets into the mainstream financial system, he dismissed adjacent concerns pertaining to the rise of stablecoins.
“There are proposals for new players who are not banks, including some of the big tech platforms and some of the social media platforms to come into the world and issue their own money,” he said. “I think that those proposals don’t yet exist at scale, so I don’t think we’re behind the curve here.”
The latest comments from Cunliffe come roughly one month after he addressed the Society for Worldwide Interbank Financial Telecommunication on Oct. 13, calling on policymakers to pursue crypto regulation as a “matter of urgency.”
Despite acknowledging that “crypto technologies offer a prospect of radical improvements in financial services.” Cunliffe argued that the sector poses significant risks through price volatility, a lack of consumer protection laws, and the absence of anti-money laundering (AML) provisions in the DeFi sector.
“How large those risks could grow will depend in no small part on the nature and on the speed of the response by regulatory and supervisory authorities,” Cunliffe said.
Related:London assembly member calls for ban on crypto ads in trains and buses
On Nov. 9 Britain’s central bank and Treasury released a joint statement outlining coming research into a central bank digital currency (CBDC) for the U.K market.
The duo will launch a consultation in 2022 to assess the viability of a UK CBDC, explore potential design features, and consider the positive and negative implications of issuing a CBDC.
The BoE added that “no decision” has been made to launch at CBDC at this stage.
Jon Cunliffe – Deputy Governor at the Bank of England – recently asserted that the risks cryptocurrencies pose to the financial sector are drawing closer. He urged regulators to take action before such an economic threat can manifest in traditional markets.
Crypto Threatening The Financial Industry?
The governor aired his thoughts in conversation with BBC’s Today Programme on Monday. He feared that the volatility of cryptocurrency markets could start to spill over into traditional financial markets. He claimed that this risk is “getting closer” and encouraged regulators to “think very hard” about the possibility.
“My judgment is they’re not, at the moment, a financial stability risk, but they are growing very fast, and they’re becoming integrated more into what I might call the traditional financial system,” he said.
This isn’t the first time Cunliffe has presented this case. Last month, he argued that crypto markets are now large enough to send shocks throughout the rest of the financial system in the event of a collapse. Indeed, the industry has grown larger than ever, having recently touched a $3 trillion market cap.
The United Kingdom’s Financial Conduct Authority is yet to introduce sufficient consumer protections around cryptocurrencies. That includes regulation covering crypto ads, such as the Floki Inu banners that started appearing on London public transport last month. However, there are apparent actions undertaken in this regard as local authorities recently banned such ads.
That said, the governor is less concerned about private company-issued cryptocurrencies, such as Meta (formerly Facebook)’s Diem. Given that they haven’t reached mass adoption, regulatory action in that area is not urgent.
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Jon Cunliffe. Source: The Times
Prospects Of A CBDC For Britons
Instead of opting for cryptocurrencies, the Bank of England has been consulting an array of experts on the development of a CBDC – nicknamed “Britcoin.” However, such a product wouldn’t be launched until at least 2025, according to policymakers. The bank will hold a consultation on the project in 2022, followed by a technical explanation of its architecture.
Cunliffe said the CBDC would be fully regulated and tethered to the sterling to decrease volatility, which he called “the safest form of money.”
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