Bank Of England Deputy Calls For Urgent
Regulation Cryptocurrencies Like Bitcoin
As the price of
Bitcoin climbed to $57,700, the Bank of England deputy governor Sir Jon
Cunliffe said Cryptocurrencies need regulation as a "matter of
urgency".
Crypto technologies
do not pose a risk to financial stability at the moment, but there are
"very good reasons" to think that this might not be the case for much
longer, Sir Jon said in a speech.
A future collapse in
the price of cryptocurrency could spread through markets, he warned. A severe
fall in the value of crypto-assets - for example, to zero - could force
investors who have taken on debt with brokers to have to find cash or sell
other assets to pay them.
"Similarly,
there is the possibility of contagion," he said. "A large fall in
crypto valuations could affect investor risk sentiment more broadly, causing
investors to sell other assets that are judged to be risky and those perceived
to have a similar investor base."
"Interconnectedness
creates the possibility that shocks are transmitted through the financial
system," he added.
In the past year,
crypto-assets have grown around 200% in value from just under $800bn (£580bn)
to $2.3tn (£1.7tn).
While this is
relatively small in the context of the $250tn global financial system, the 2008
financial crisis was triggered by the sub-prime sector which was valued then at
$1.2tn, Sir John said.
Most crypto-assets,
such as Bitcoin, are not backed up in the real world by assets or commodities,
but strings of computer code, and make up 95% of the $2.3tn. As a result, they
are volatile, he said.
Connections between
cryptocurrencies and the traditional financial system are also growing as big
investors, hedge funds and banks become more involved, Sir Jon said.
"Bringing the
crypto world effectively within the regulatory perimeter will help ensure that
the potentially very large benefits of the application of this technology to
finance can flourish in a sustainable way," he added. Source: BBC.
China recently
banned all Crypto trading, having previously outlawed Crypto, mining to avoid a
similar risks as well as any challenge to their markets and own digital
currency.
Central banks and
major governments will not allow Cryptocurrency to replace the currency which
they control. Crypto is not recognised or even taxed as currency.
The Bank of England
previously advised that people should only invest money into Crypto that they
could afford to lose. When you borrow to buy Crypto or other volatile assets
such as stocks and shares – a practice usually known as gambling - you risk
losing more than your original stake.
Before the 1929
stock market crash, people were able to borrow to buy stocks using the stock as
collateral. When the price dropped by 70%, the broker made a margin call
demanding repayment which pushed thousands of people into bankruptcy.
With inflation
eating away the buying power of savings where can you invest for higher returns
without risk? The answer is that all investment carries a degree of risk. Even
money on deposit in a bank is at risk if the bank fails, although most
governments have some sort of deposit protection scheme in place.
Cryptocurrency is a high-risk
investment, and some would call it speculation. Investing in the stock market
can also be risky, as values can go down as well as up. Blue-chip shares, in
major well-established companies, are less risky than smaller companies or
start up tech firms for instance.
Property investment can
be risky especially if you don’t know what you are doing, like buying blind at
an auction because you’ve watch ‘Homes Under The Hammer”!
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