BoE’s Cunliffe: FTX collapse demonstrates need for crypto regulation

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Source: Investment Week

The collapse of FTX provides a “compelling demonstration” of why greater regulation of the cryptoassets space is necessary, said Jon Cunliffe, deputy governor of the Bank of England, in a speech yesterday (21 November).

Describing the collapse as “probably the largest – and certainly the most spectacular – failure to date in the crypto ecosystem”, Cunliffe also said the event had pushed the central bank towards developing a digital currency.

FTX’s failure encapsulated the “general themes” present in many poor financial services companies, the first being that “technology in and of itself does not change the need for transparency”, according to Cunliffe.

He argued that regulation allows firms to be properly constrained with transparency, while also noting the confusingly interlinked nature of the FTX organisation that made it more vulnerable to collapse could have been curtailed with better oversight.

He continued: “A firm accepting its own unbacked crypto asset as collateral for loans and margin payments, as there are indications may have happened with FTX, creates extreme ‘wrong way’ risk – i.e. when the exposure to a counterparty increases together with the risk of the counterparty’s default.”

The need to protect both investors and financial stability are two key reasons for Cunliffe why regulation is necessary, as he argued: “We should not wait until it is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact.”

However, fostering innovation is another core reason to regulate crypto, allowing a safer and less volatile space for innovation to occur.

Cunliffe said that the central bank intends to consult early next year on a regulatory framework to apply to systemic payment systems and the services such as wallets, setting out how, for example, backing assets should be managed for stablecoins.

He concluded: “The FTX example underlines how important these aspects are.”

Cunliffe also touched on a central bank digital currency (CBDC), which the Bank of England has been examining for some time. He confirmed the bank’s plan to issue a consultative report at the end of this year “setting out the next steps that we propose”.

Arguing that there is “no connection” between FTX and a CBDC, he stressed that as tokenised money develops, the UK must ensure that all money that circulates is “robust” and denominated in pound sterling.

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