(Bloomberg) — The Bank of England reiterated its warning that the rapid growth of cryptocurrency assets could pose stability risks to the U.K. financial system, even though the current direct risks are “limited.”
The central bank’s Financial Policy Committee said crypto assets are becoming more interconnected with the wider financial system, and enhanced regulatory and law enforcement frameworks are needed to manage risks, according to its December Financial Stability Report. Financial institutions should take a “cautious and prudent approach” to any adoption of crypto assets until a regulatory regime is in place, it said.
While crypto assets currently represent a small fraction of institutional investor portfolios, they have the potential to grow rapidly, it said. A large fall in crypto asset valuations may cause institutional investors to sell other financial assets and potentially transmit shocks through the financial system, it warned, and the use of leverage can amplify any spillovers.
Although no major U.K. banks have reported direct exposures to crypto assets, some are starting to offer crypto derivatives trading and custody services, the report said.
In October, BOE Deputy Governor Jon Cunliffe said the fast-growing cryptocurrency market could pose a threat unless urgently regulated, a comment that marked a shift for the central bank, which has brushed off digital currencies as assets without an intrinsic value. The Monday report said it welcomes the U.K. Treasury’s regulatory proposal for “stablecoins,” including bringing systemic stablecoins into the bank’s regulatory remit.
“It takes time to develop regulatory standards,” Cunliffe said in a press conference Monday. “We’ll need to make sure we have regulation in place before it becomes a problem.”
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