- Bank of England Deputy Governor Sam Woods has written to bank, insurance, and investment firm CEOs in a letter titled “Existing or planned exposure to crypto-assets.”
- Woods says these new assets are risky, but sets out a framework for companies to use when assessing the risks if they do want to invest.
- “We… recognise that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time,” Woods writes.
The Bank of England has cautiously endorsed cryptocurrency technology and outlined a framework for banks that want to invest in crypto-assets.
Sam Woods, a deputy governor at the Bank of England and head of the Prudential Regulation Authority, one of Britain’s key financial watchdogs, wrote a letter on Thursday to CEOs of banks, insurance companies, and investment firms titled “Existing or planned exposure to crypto-assets.”
Woods did not ban nor caution against firms investing in crypto assets and in fact wrote: “We… recognise that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time.”
Distributed ledger technology was first popularised by bitcoin and allows multiple parties to view and edit a decentralized database. Fans of the technology believe it could help drive efficiency by cutting out middlemen in everything from trading to supply chains.
The Bank of England’s position contrasts markedly with the Bank of International Settlements (BIS), often called the central bank of central banks, which dismissed the technology in a scathing report on bitcoin and other cryptocurrencies earlier this month.
“Cryptocurrency technology comes with poor efficiency and vast energy use,” the BIS wrote. “Cryptocurrencies cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value.”
Woods did flag issues around price fluctuation, illiquidity, fraud, price manipulation, terrorist financing, and money laundering related to cryptocurrencies and assets. But the deputy governor presents a framework for how to manage these risks rather than forbidding regulated firms from handling them.
Any firms dabbling in crypto should get “the board and highest levels of executive management” to consider the associated risks, the Bank of England said.
Remuneration policies should not be tied to risk-taking in the space and firms should seek out crypto experts to help them “conduct extensive due diligence before taking on any crypto-exposure.” Companies should also consider their cybersecurity measures and potential reputational risk, the central bank writes.
Regulators around the world have been trying to get to grips with how to regulate cryptocurrencies and the lack of clarity has left many companies concerned about what could happen if they do invest in cryptocurrencies and assets.
The US Securities and Exchange Commission has been particularly vocal about cryptocurrencies. The regulator said initially that most crypto assets it has seen resemble unregistered securities, but the SEC clarified earlier this month that it does not think ether, the second-biggest crypto asset by market value, is a security.
“Discussions are ongoing, including amongst authorities internationally, on the prudential treatment of crypto-assets,” Woods writes in his letter. “We will communicate any supervisory or policy updates on the prudential treatment of crypto-assets… in due course.”
2017 saw an explosion of new crypto assets being created through initial coin offerings, where startups issue their own digital tokens. There are over 1,500 in circulation, according to industry data platform CoinMarketCap.com. Tokens broadly fall into three categories: cryptocurrencies or crypto commodities, like bitcoin or litecoin that are used to transact and store value; utility tokens, which are used to fulfil some function within a new crypto ecosystem such as paying for decentralized file storage; and crypto securities.
“Although classification will depend on the precise features of the asset, crypto-assets should not be considered as currency for prudential purposes,” Woods wrote in the letter.
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