The Bank of England's deputy governor for financial stability, John C uncliffe, has warned that cryptocurrencies could trigger a global financial crisis if strict rules are not put in place.

 

In his speech on Wednesday, Cunliffe compared the growth rate of the crypto asset market from $16 billion five years ago to $2.3 trillion today to the $1.2 trillion subprime mortgage market in 2008.

 

"When something in the financial system grows very fast and grows mostly in an unregulated space, financial stability authorities should sit down and pay attention to it," he said.

 

Cunliffe acknowledged that governments and regulators should be careful not to overreact or classify new approaches as "dangerous" simply because they are different, and noted that crypto technologies offer the prospect of "radical improvements" in financial services.

 

However, in his opinion, the risks of financial stability remain limited, the current use of crypto assets raises concerns about financial stability, since most of them "have no intrinsic value and are vulnerable to serious price corrections."

 

Bitcoin and Ethereum, the two largest cryptocurrencies, fell in value by more than 30% earlier this year before recovering, and have proven to be extremely volatile since their inception. Prices are subject to a variety of external factors, from comments by Tesla CEO Elon Musk to regulatory repressive measures by the Chinese government.

 

"The crypto world is starting to connect to the traditional financial system, and we are seeing the emergence of players with leverage. And, crucially, it happens mostly in unregulated space," Culliffe said.

 

His comments echo 200 from Bank of England Governor Andrew Bailey in May, who warned that cryptocurrency investors should be prepared to lose all their money due to the lack of "intrinsic value" of assets.

 

The UK's Financial Conduct Authority has also warned of the risky nature of cryptocurrency investments.

 

Callyff said the risk to financial stability could rise rapidly if the market continues to expand at this rate, but the scale of those risks will be determined by the speed of response from regulators and governments.

 

He noted that over the past five years, the price of bitcoin has fallen by 10% in one day almost 30 times, the largest of which was a drop of almost 40% after a cyber incident on the Seychelles exchange of bitcoins and cryptocurrencies BitMEX.

 

"The next question is what could happen as a result of such events if these crypto assets continue to grow at scale, if they continue to become increasingly integrated into the traditional financial sector, and if investment strategies continue to become more complex?" said Cunliffe.

 

Conliffe argued that crucial to whether the system could absorb major price adjustments, burdening some investors with painful losses but avoiding a blow to the real economy, depended primarily on interconnectedness and leverage.

 

Both were present in the subprime mortgage market until 2008, leading to side effects that eventually brought the global economy to its knees, and both are becoming increasingly prominent in the crypto space, Cunliffe suggested. He said it was up to the authorities to manage this growing risk and ensure that the system was resilient to major fixes.

 

"While cryptocurrency finance works in a new way, well-designed standards and regulations can and should allow risk management in the cryptocurrency world in the same way that they are managed in the world of traditional finance," Cunliffe said.

 

Many regulators around the world have begun work to create a public policy framework through which to manage the exponential growth of crypto assets, but Cunliffe said this needs to be done urgently.

 

"Technology and innovation have contributed to the improvement of finance throughout history. Crypto technologies open up great opportunities. As [Ralph Waldo] Emerson said, "If you build a better mousetrap, the world will pave the way for your door," he said.

 

"But it has to be a really better mousetrap, not one that just works to lower standards – or no standards at all."