Jon Cunliffe, deputy governor for financial stability at the Bank of England, has warned that cryptocurrencies could spark a global financial crisis if strict regulations are not put in place.

Jon Cunliffe – Deputy Governor of the Bank of England

In a speech on Wednesday (October 13), Cunliffe compared the growth rate of the cryptocurrency market from $ 16 billion five years ago to $ 2.3 trillion today with the billion dollar market in 2008.

“If something in the financial system is moving very quickly and in a largely unregulated space, the regulators for financial stability really have to be careful.”

Governments and regulators must also be careful not to overreact or classify new approaches as “dangerous” just because they are different, he acknowledged, noting that cryptocurrency technologies offer the prospect of “radical improvement” in financial services.

While the risks to financial stability remain limited for the time being, the current applications of e-money systems raise concerns about financial stability as they are largely “priceless”, intrinsic value and large price corrections.

Bitcoin and Ethereum, the two largest cryptocurrencies, lost more than 30% in value earlier this year before recovering and have proven to be extremely volatile since their inception. Prices are vulnerable to a variety of external factors, from Elon Musk’s comments to the Chinese government’s sanctions.

“The crypto world is beginning to merge with the traditional financial system and we are seeing the emergence of leveraged actors. And above all, this happens in a largely unregulated space, “clarified Cunliffe.

Cunliffe’s comments echo those of Bank of England Governor Andrew Bailey, who warned in May that crypto investors should be ready to lose it all due to the lack of cryptocurrency.

The British financial regulator, the Financial Conduct Authority, has also warned of the risky nature of investing in cryptocurrencies.

Cunliffe said that if markets continued to expand at such a rate, risks to financial stability could increase rapidly, but the extent of those risks will be determined by the speed with which authorities, management and government react.

Cunliffe pointed out that Bitcoin price has fallen 10% 30 times in a single day over the past five years, with the biggest drop being nearly 40% following a network crash on the Seychelles-based BitMEX exchange.

“The question in the future is what can happen from such events if these cryptocurrencies continue to grow on a large scale, integrate further into the traditional financial sector and if the investment strategies become more and more complex?”

The Deputy Governor argued that the question of whether major price corrections can be absorbed by the system, causing some investors to suffer heavy losses but not having a direct impact on the real economy depending on the subject, is weak in terms of linkage and leverage.

Both were present in the subprime mortgage market prior to 2008 and had a strong impact that ultimately drove the global economy into decline and increased connectivity and debt in the crypto space, Cunliffe suggested. This will depend on how the authorities deal with the growing risk and ensure that the system is resilient to major corrections.

Many regulators around the world have begun creating a public policy framework through which to control the exponential growth of cryptocurrencies, but Cunliffe said that must be done.

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