Bank of England warns digital currency growth could pose financial stability risks


The Bank of England (BoE) is concerned about the impact of digital currencies on financial stability as adoption skyrockets. In a recent report, the bank said digital currencies only make up a tiny percentage of the country’s assets, but with adoption surging, regulation is needed to protect the economy.

the Financial Stability Report examined what the Financial Policy Committee considers the greatest risk to the UK financial system and what it is doing to eliminate or reduce the risks. Besides digital assets, he touched on the impact of COVID-19 on the economy, the resilience of the country’s banks in the current financial climate and mortgage measures.

Regarding digital currencies, the central bank believes that they could bring many benefits, including reduced payment frictions and inefficiencies. These benefits, however, can only be realized if they are accompanied by effective public policies that mitigate the risks.

Currently, digital assets do not pose a major risk to the UK economy, the bank believes. “However, they will present a number of risks to financial stability if they continue to grow at their current rapid rate and as they become more interconnected with the wider financial system,” he added.

One of the BoE’s biggest concerns is the volatility of digital asset prices. He noted in his report that 95% of existing digital currencies are unsecured and have no underlying assets. This means they have no intrinsic value and are vulnerable to large price corrections, according to the central bank.

Sir Jon Cunliffe, the BoE’s deputy governor, doubled down on this criticism in an interview following the publication of the report.

“Their price can vary quite considerably and they could theoretically or practically drop to zero. The point, I think, when you worry is when it fits into the financial system, when a sharp price correction could really affect other markets and affect established players in the financial markets ”, said the deputy in an interview with BBC.

Again another frame in the bank tore up digital currencies again in a blog post, claiming that Bitcoin “is not used to price anything other than itself.” Thomas Belsham, an employee of the bank’s stakeholder engagement and media division, believes the fixed cap of $ 21 million built into Bitcoin could ultimately become his biggest barrier to adoption.

He thinks it’s only a matter of time before smart investors throw their Bitcoin on the majority.

“Simple game theory tells us that a backward induction process should, really, at some point make the smart money come out. And if that happens, investors should really be prepared to lose it all. Ultimately, ”Belsham said.

In its report, the BoE called for regulations, saying it was the safest way to ensure investors don’t end up losing all of their money.

“Strengthened regulatory and enforcement frameworks, both nationally and globally, are needed to influence developments in these fast-growing markets in order to manage risk, encourage sustainable innovation, and maintain confidence and trust. broader integrity in the financial system, ”he added. noted.

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