Bank of England External Member of the Financial Policy Committee Carolyn A. Wilkins will deliver a speech to the Québec Autorités des marchés today. The text of her speech has been released in advance of the presentation and she will be addressing the booming crypto market as well as the illicit activity that has undermined the sector along with what needs to be done to further crypto innovation.
Wilkins shares her opinion on crypto including the belief that the digital asset sector is the “bedrock of the emerging financial ecosystem.” Thus, financial soundness and consumer protection are of utmost importance.
Wilkins notes that crypto markets have jumped from just USD $16 billion five years ago to over USD $2.6 trillion today – an annualized growth rate of 150%.
While stating that crypto is challenging traditional financial services including addressing inefficiencies in certain sectors, there has been a rise in nefarious activity alongside this growth:
“Much of the crypto-related illicit activity has so far been made up of scams and darknet markets. Ransomware attacks grew an astonishing 300 per cent last year as work-from-home practices to combat COVID-19 presented new vulnerabilities for businesses,” says Wilkins. “… The future of this new frontier depends critically on the regulatory response to these new activities and how fast the traditional financial system modernises. This will take major investments in domestic and cross-border payments, as well as digital governance.”
While supportive of crypto foundations, Wilkins is not a big fan of Bitcoin because it is “not useful as a store of value” serving as a “speculative asset” and has “no intrinsic value.”
Regarding stablecoins, Wilkins says any benefits will only be achieved if these digital assets are safe.
Regarding DeFi, Wilkins says that despite certain advantages over centralized or traditional finance there remain some familiar problems:
“The most immediate [issues] relate to fraud, misappropriation, and conflicts of interest, including those arising from misleading disclosures, misuse of inside information, and manipulative trading activities. And, in some cases, despite claims of decentralisation, operations and activities within DeFi are governed or administered by a small group of developers and investors. This raises serious governance issues, including whether miners, programmers, and others should have fiduciary duty. There is also risk related to money laundering and terrorist financing. That is why FATF (the Financial Action Task Force) recently updated their guidance for virtual assets and virtual asset service providers and added new guidance on how DeFi and distributed applications (DApp) relate to the FATF Standards. Investors and users of DeFi are also exposed to important risks related to the underlying technology.”
While security has improved, fraud and cyber-attacks continue. Wilkins points to the example of DeFi protocol Titanium that at one point was valued at around $2 billion. Today it is hovering around zero.
While these glaring problems undermine the crypto sector, competition and innovation are important for the future of financial services. Wilkins says crypto needs to focus on “three building blocks” including policy and regulation, modernization of cross-border payments and transfers, and up-to-date data governance.
Profound problems aside, Wilkins is a crypto believer:
“To get the most out of these innovations, we need to modernise our legal and regulatory frameworks so that businesses and investors have clear and predictable rules of the game, and the risks to the financial system are managed. This will take major investments in domestic and cross-border payments, as well as digital governance. If we do that, we will realise the promise of reinvention and expansion for those who rely on efficient and trustworthy financial services.”
This is an interesting speech and perspective on crypto and may be downloaded here.