Crypto Contagion? Not Yet. Bank of England Discusses Financial Stability


It has been a tough few weeks for crypto assets. Fears of contagion ripped through the sector when several firms shut down withdrawals. This week, Voyager Digital filed for bankruptcy protection the in the US under Chapter 11. This was predicated by the pending liquidation of Three Arrows Capital (3AC), a firm that had bowered over $650 million from Voyager only to default on the loan.

All of this simply highlights crypto industry shortcomings and the pressing need for greater centralized regulation – something some industry participants aim to avoid. Unfortunately, the digital asset industry has failed to take the initiative, a glaring example of where Regtech could solve the issues of counterparty risk, if properly managed. If only.

Earlier this week, the Bank of England published a note on the stability of the UK financial system and digital assets were on the list.

The BoE noted that “crypto-asset valuations have fallen sharply, exposing a number of vulnerabilities within cryptoasset markets, but not posing risks to financial stability overall.” While stating the risks will probably not spread into tradition mar kets the Bank pointed to the crypto vulnerabilities:

“These include liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls. Investor confidence in the ability of certain so-called ‘stablecoins’ to maintain their pegs was weakened significantly, particularly those with no or riskier backing assets and lower transparency.

These events did not pose risks to financial stability overall. But, unless addressed, systemic risks would emerge if cryptoasset activity, and its interconnectedness with the wider financial system, continued to develop. This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities.”

The Bank also said that stablecoins need more regulation and absent more rules problems may arise:

“In the UK, the FPC has set out its expectation that stablecoins used as money-like instruments in systemic payment chains – including those used in payments for financial assets and financial market instruments – should meet equivalent standards to commercial bank money in relation to stability of value, robustness of legal claim and the ability to redeem at par in fiat.”

None of this should come as a surprise to anyone.

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