Given that digital assets are continuing to work their way into these institutions, sentiment over crypto volatility and otherwise could cause “investors to sell other assets that are judged to be risky.” Cunliffe referred to the interconnectedness of crypto and traditional finance as having the potential for a shock “transmitted through the financial system” if something were to go wrong.
Jon Cunliffe, deputy governor for financial stability at the Bank of England, said the risk of a developing crypto market on the monetary framework are “relatively limited” right now however can possibly become quickly if controllers don’t keep pace. In a discourse to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) on Oct. 13, Cunliffe said policymakers all throughout the world have just started to foster the structure expected to appropriately manage digital assets however should seek after it “as a matter of urgency.” The deputy governor talked about the risks that cryptocurrencies and stablecoins may present when associated with conventional financial systems through individuals, financial institutions, hedge funds and banks.
One of the scenarios that Cunliffe posed was if the price of an unbacked crypto asset were to fall to zero. In addition, price volatility — even seemingly among major cryptocurrencies — “could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.”
“Financial stability risks currently are relatively limited but they could grow very rapidly if, as I expect, this area continues to develop and expand at pace,” said Cunliffe. “How large those risks could grow will depend in no small part on the nature and on the speed of the response by regulatory and supervisory authorities.”
Cunliffe has previously argued that England’s central bank should “issue public digital money that can meet the needs of modern day life,” implying that a digital pound may be in the BoE’s future. He is currently co-chairing a task force set up by the U.K. government to explore the rollout of a central bank digital currency.
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