Bank of England to Ramp Up Talks on Crypto Rules as Data is Elusive

It hasn’t been easy for the Bank of England (BoE) to uncover information it needs on the institutional exposure to cryptocurrency. As a result, the United Kingdom’s central bank said it plans to increase the pace of global talks to establish regulations on the world’s newest assets.

Sarah Breeden, BoE’s director for financial strategy and risk, told The Times that if banks wish to offer cryptocurrency trading and custody services, regulators across the globe must design rules to protect the world’s financial system.

But gathering the data needed to assemble a regulatory network cannot be done by just the U.K alone, Breeden added. If new measures are to be successful, financial institutions and central banks must cooperate with the Financial Stability Board. The G-20 organization is responsible for making recommendations to keep the financial network stable.

The BoE recently said in its Financial Stability Board Report (FSB) that while crypto holdings in the U.K. do not pose a threat to the financial network, its dramatic growth could become more dangerous as the currencies become increasingly linked to wider financial systems and the broader economy.

“Material growth in banks’ exposures to unbacked crypto assets would expose them to financial, operational and reputational risks,” the BoE wrote. While not a single major U.K. bank has reported direct exposure to crypto, the BoE said, many are now offering derivatives trading and custody services.

There’s fear that if institutional investors are exposed to crypto as a major part of their investments, any precipitous fall in crypto values could lead financial institutions to sell other assets and perhaps send shockwaves through the financial system.

The BoE said “enhanced regulatory and law enforcement frameworks, domestically and at a global level” is essential and that the growth of crypto asset exposure must be met with reporting transparency.

Earlier this month, PYMNTS reported BoE Governor Andrew Bailey said while the crypto asset market may not be a financial stability risk today, it has all the makings of something that could become one.

“At the current rapid pace of growth, and as these assets become more interconnected with the wider financial system, crypto-assets will present a number of financial stability risks,” he said at a press conference.

See: Calling for New Regulatory Framework, BoE Governor Says Crypto Becoming Threat to UK Financial Stability

In October, an FSB survey found that cryptocurrencies linked to real-world assets are not being used on a large scale for payments. The survey acknowledged the market capitalization of existing stablecoins has grown over the last two years, and that they could eventually contribute to improved cross-border payments.

CoinGecko, which calls itself the world’s largest independent cryptocurrency data aggregator with more than 6,000 different crypto assets tracked across more than 400 exchanges, recently reported that stablecoin issuers have minted more than $133 billion worth of tokens.

“From a policy perspective, there is value in assessing whether and how the use of well-designed global stablecoins could enhance cross-border payments. An action to that extent has been added,” the report said.

MoneyGram, one of the largest cross-border payments companies, has said it is examining the use private stablecoins, such as USDC, to speed cross-border transactions. Such moves are making regulators nervous.

The FSB roadmap is the latest document to consider how private stablecoins in cross-border transactions should be regulated. In addition, the Bank for International Settlements (BIS) published guidance on how international payments laws could be applied to stablecoins.

Many financial institutions are encouraging the exploration of central bank digital currency (CBDCs). For example, the BIS, the International Monetary Fund (IMF) and the World Bank (WB) said the world’s central banks must consider the cross-border implications of CBDCs. Last month, Benoit Cœuré, the head of the BIS Innovation Hub, signaled central banks should speed up work on CBDCs in light of stablecoins.

“The time has passed for central banks to get going,” Cœuré said in a speech at the Eurofi Financial Forum in Ljubljana. He said regulators should roll up their sleeves and accelerate work on the nitty-gritty of CBDC design.

“CBDCs will take years to be rolled out, while stablecoins and crypto-assets are already here,” he said. “This makes it even more urgent to start.”