Cryptocurrencies are growing so quickly that soon a large fall in the cost of Bitcoin could have a knock-on effect on the wider economy, a top Bank of England official has said.
Jon Cunliffe, the Bank’s deputy governor for financial stability, said the crypto markets were on a path to becoming much bigger.
Right now a drop across the board in the price of cryptocurrencies will largely cause only crypto investors to lose out. But this could change.
“While a severe price correction would not cause financial stability problems now, all else equal, the current trajectory implies that this may not be the case for very long,” he said.
He said that regulators, which would include the Bank of England, need to think about how to deal with crypto markets.
Although crypto finance operates in novel ways, well-designed standards and regulation could and should enable risks to be managed in the crypto world as they are managed in the world of traditional finance
Jon Cunliffe, Bank of England
“Although crypto finance operates in novel ways, well-designed standards and regulation could and should enable risks to be managed in the crypto world as they are managed in the world of traditional finance,” he said.
He said there are “potentially very large benefits” from applying the technology to normal financial markets.
“Regulators internationally and in many jurisdictions have begun the work. It needs to be pursued as a matter of urgency,” Mr Cunliffe said.
The crypto market has grown massively in recent years. Cryptoassets have tripled in 2021 alone, and have increased from 16 billion dollars (£11.7 billion) worldwide five years ago, to 2.3 trillion dollars (£1.68 trillion) today.
It is still a small part of the 250 trillion dollar (£183 trillion) global financial system, however a part which is rowing rapidly.
As a comparison, Mr Cunliffe said, the sub-prime mortgage sector was only valued at 1.2 trillion dollars (about £1 trillion) before the 2008 financial crash, which reverberated around the world.
Whether falls in cryptocurrencies have an impact on the wider market will depend on the ties between the two.
The loss to retail investors who decide to buy Bitcoin would be painful to them personally, but probably not big enough to risk damage to the financial system.
But there is increased interest from crypto hedge funds, traditional hedge funds, and even from banks.
The international banking standards Basel Committee is looking into how to treat cryptoassets on bank balance sheets.
But industry bodies for the banks have indicated they want to increase their crypto exposure.