Bank of England governor: Crypto can spark global financial crisis

Jon Cunliffe, Bank of England’s deputy governor for financial stability, issued a dire warning that cryptocurrencies would result in a global downturn unless regulators stepped up their game. He compared crypto market growth to that of the subprime mortgage market in 2008 in a speech on Wednesday. The crypto market has increased from $16 billion to $2.3 trillion in the past five years.

Cunliffe commented:

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When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice. The crypto world is beginning to connect to the traditional financial system and we are seeing the emergence of leveraged players. And, crucially, this is happening in largely unregulated space.

The deputy governor recognizes that regulators should not classify new approaches as “risky” and overreach just because they are different, but points out that the current applications of crypto can be seen as concerning in terms of financial stability because most coins are highly volatile.

Crypto has no intrinsic value

Cunliffe added that crypto has no intrinsic value. He cited the two biggest cryptocurrencies by market cap as examples of the asset class’ volatility. Both of them lost more than 30% in value earlier this year before recovering. In the past few years, Bitcoin (BTC/USD) has lost 10% in value in just one day on almost 30 occasions. After BitMEX suffered an incident, Bitcoin dropped by nearly 40%.

Cunliffe asked a rhetoric question on that note:

What could result from such events if these crypto assets continue to grow at scale, if they continue to become more integrated into the traditional financial sector and if investment strategies continue to become more complex?

According to him, leverage and interconnectedness are the main factors that determine whether the system can handle major price corrections and avoid painful losses for the real economy.

He points out that this happened in the subprime mortgage market, resulting in losses that ultimately affected the entire world. It’s up to regulators to manage escalating risk and make sure the system can cope with volatility.