Deputy Governor of the Bank of England: Cryptocurrencies can trigger a crisis like 2008

Bank of England Deputy Governor Jon Cunliffe, in charge of financial stability, warned that digital currencies could cause a global financial crisis if the parties don’t put tough controls in place.

The digital asset market is from 16 Billion USD (5 years ago) to 2.3 thousand Billion USD at this moment. In an October 13 speech, Mr. Cunliffe compared the growth rate of the digital asset market to the 1.2,000 subprime mortgage bond market. Billion USD 2008 in the USA.

“When something in the financial system is growing so fast that there is no oversight, the financial stability authorities need to keep an eye on it,” he said.

Mr Cunliffe also admitted that governments and watchdogs need to be careful not to overreact or view novelties like cryptocurrencies as “dangerous” just because they are different. He said virtual currency technology offers the prospect of “fundamentally improving” financial services.

Although the risks that virtual currencies pose to financial stability are currently limited, the Bank of England Deputy Governor said, existing digital asset applications raise financial stability concerns as most virtual currencies today “have no intrinsic value and” are easily subject to sharp price corrections “.

Bitcoin and Ethereum – the two largest digital currencies in the world – lost more than 30% of their value before “recovering”. This represents the notorious volatility of cryptocurrencies. The price is very easily influenced by external factors such as comments of the CEO Tesla Elon Musk or the tightened control of the virtual currency market by the Chinese government.

“The world of virtual currencies is beginning to merge with the traditional financial system and we are seeing the emergence of leveraged actors. More importantly, this is happening in a generally unregulated space, ”said Cunliffe.

Mr Cunliffe’s comments resembled the warning issued by Bank of England Governor Andrew Bailey in May. Mr Bailey said at the time that cryptocurrency investors should prepare for the possibility of losing all of their money because cryptocurrencies do not “intrinsic value.”

The British Financial Supervisory Authority (FCA) also warns of the risky nature of investing in virtual currencies.

Cunliffe said that the risks to the financial system could increase dramatically if the money market continued to grow at such a rate, but the extent of the risk would be determined by the speed of reaction of the authorities and the government.

This expert pointed out that Bitcoin had a price decrease of at least 10% about 30 times in just one day over the past 5 years, with the largest being a decrease of nearly 40% within 24 hours of virtual currency exchange.

“So what can happen to such events in the future if these digital assets continue to grow strongly, if they continue to increase their involvement in the traditional financial system and if the investment strategies become more and more complex? ”Said Mr. Cunliffe.

The more important question is, can the financial system absorb the dizzying corrections of virtual currencies that are causing investors heavy losses without spilling over into the real economy? This mainly depends on the level of connectivity between the virtual currency market and other markets and the level of leverage, said Cunliffe.

Both of these two risk factors were present in the subprime mortgage market in the US prior to 2008, which resulted in wide-ranging implications and ultimately the collapse of the global economy. Right now, both factors are becoming more and more apparent in the cryptocurrency market, according to Mr. Cunliffe. The Deputy Governor of the Bank of England said the authorities need to manage this growing risk and ensure the financial system is stable against the sharp corrections in the virtual currency market.

“Although digital finance works in new ways, rigorous and properly established standards and regulatory requirements will help manage virtual currency risk, much like managing digital currency in traditional finance,” said Cunliffe.

Many guard dogs around the world have begun creating a political framework to deal with the explosive growth of the cryptocurrency market, but Mr Cunliffe says this needs to be accelerated because of the urgency of the problem.

“Technology and innovation have driven the financial industry throughout history. Cryptocurrency technology offers a great opportunity, but it operates in a low-standard or even non-standard environment, ”Cunliffe said.