Sir Jon Cunliffe has spoken on recent crypto market developments. He started with an overview of the failure of FTX and looking at how regulation could impact on activities such as those FTX carried out. He noted that entities like FTX appear to operate as conglomerates and bundle products and functions within one firm which traditionally have been carried out either within separate legal entities or else carefully ring-fenced and controlled. He spoke on the value of good collateral. Unbacked crypto-assets are highly volatile and firms that accept them, and even worse where they use their won as FTX may have done, create and extreme “wrong way” risk where exposure to a counterparty increases wtih the risk of the counterparty’s default. Also, since crypto evolved outside regulation, it has none of the traditional concepts of client money protection.
The question is how regulation should deal with the issues. Sir Jon said he is not convinced that moving to decentralised platforms is the answer, but that regulation to protect investors and financial stability is. He also said that regulation to foster innovation is critical, such that innovative approaches that use technological advance can ensure the benefits of new technology and business models flow from innovation rather than from regulatory arbitrage.
He moved on to discuss the approach being taken in the FSM Bill and in particular the controls on the use of stablecoins as payment, with follow up wider consultations.
Finally he spoke on the BoE’s work on CBDC.