The Bank of England on Thursday began drafting Britain’s first regulatory framework for cryptocurrency assets, saying that while the sector remains small, its rapid growth could pose risks to future financial stability if left unchecked.
Cryptoassets have come under regulatory concern amid concerns it could be used to circumvent financial sanctions imposed on Russia since its invasion of Ukraine.
“While crypto assets are unlikely to provide an appropriate way to circumvent sanctions on a scale at this time, the possibility of such behavior underscores the importance of ensuring innovation in crypto assets is accompanied by an effective public policy framework to … maintain broader trust and integrity in financial system, ”the BoE’s Monetary Policy Committee (FPC) said in a statement on Thursday.
Cryptoassets, such as bitcoin and ether, are largely unregulated as they are outside the regulatory ‘perimeter’ and legal changes are needed to bring them under the full scope of UK securities regulations, a move being seen by Britain’s finance ministry.
“This is likely to require the expansion of the role of macro and micro prudential regulators, the conduct and integrity of existing markets, and close coordination among them,” the FPC said.
The FPC said the direct risks to financial stability from crypto are currently limited, but if the recent growth rate is maintained, there will be risks in the future.
The sector globally grew tenfold between early 2020 and November 2021, and now accounts for $ 1.7 trillion or 0.4% of global financial assets, with over 17,000 different crypto asset tokens in circulation.
The rules for the sector should be based on “equivalence”, which means that crypto-related financial services that perform similar functions to existing financial services should be subject to the same laws, the FPC said.
Until crypto assets are brought fully under the regulatory network, the BoE is focused on ensuring that risks from crypto are controlled in the banking sector. The Financial Conduct Authority on Thursday told firms they must fully explain to consumers the risks of unregulated crypto.
Regulators around the world are also trying to grapple with crypto assets and their branches.
BoE Deputy Governor Sam Woods wrote to lenders on Thursday, noting the growing interest from banks and investment firms in the sector.
The risks from crypto should be “fully considered” by bank boards and they may need to adjust their existing risk management strategies and systems, Woods told them.
“We also expect firms to discuss prudential treatment proposals for crypto asset exposures with their supervisors,” Woods said referring to the amount of capital required to cover any losses.
The BoE launched a survey of banks ’existing disclosures and future crypto plans, setting a June 3 deadline for feedback.
Stablecoin, which is backed by assets or cash, which becomes systemically important needs to be backed by high -quality liquid assets and loss -absorbing capital similar to those held by banks, the FPC said.
Using deposits with commercial banks to provide collateral for stablecoin would pose significant financial stability risks if done on a scale, the FPC said.
The BoE and the Financial Conduct Authority will conduct further work on regulations for stablecoin and negotiate a regulatory “model” for systemic stablecoin by 2023, the FPC said.