BOE’s Cunliffe says regulation can save crypto from itself and it’s worth the effort

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Bank of England Deputy Governor Jon Cunliffe shared thoughts on cryptocurrency regulation and decentralized finance (DeFi) in a talk on Nov. 21. He intended to speak about stablecoins and central bank digital currency (CBDC), Cunliffe said at a conference in Coventry, but the collapse of FTX as he wrote his draft speech led him to some more general observations as well.

FTX and a number of other centralized crypto-asset exchanges “appear to operate as conglomerates, bundling products and functions within one firm” without the tight controls of traditional finance, Cunliffe said. There is “some tentative and limited evidence” that the failure of FTX has stimulated transfers to decentralized platforms, although he took little comfort in this:

“It is not clear the extent to which these platforms are truly decentralised. Behind these protocols typically sit firms and stakeholders who derive revenue from their operations. Moreover it is often unclear who, in practice, controls the governance of the protocols.”

Regulation is needed to protect consumers, protect financial stability and encourage innovation, Cunliffe said, and:

“While the crypto world, as was demonstrated during last year’s crypto winter and last week’s FTX implosion is not at present large enough or interconnected enough with mainstream finance to threaten the stability of the financial system, its links with mainstream finance have been developing rapidly.”

The Bank of England, Financial Conduct Authority and HM Treasury are setting up a regulatory sandbox to refine “the technologies that have been pioneered and refined in the crypto world, such as tokenisation, encryption, distribution, atomic settlement and smart contracts” that offer benefits for the financial system.

Cunliffe quoted himself comparing crypto assets to “unsafe aeroplanes” to demonstrate the role of regulation in innovation. Crypto “will only be developed and adopted at scale within a framework that manages risks to existing standards,” Cunliffe said. Failure to control risk could present an existential threat to crypto, he said, citing a Nov. 17 essay in the Financial Times that suggests crypto might “implode under the pressure of its unsafe and unsound business practices,” and, the authors said, financial officials should allow it to happen.

Related: BoE policy talk: DeFi had better implement good governance before it’s too late

Cunliffe said the Bank of England would release a consultative report on the issuance of a British pound CBDC toward the end of the year. He said:

“I do want to emphasise that this work, and any future decision to introduce a digitally native pound should not be seen in the context of the status quo but rather in the context how current trends in money, payments and technology might evolve.”

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