BoE Eyes Cryptocurrency Regulation

In a speech titled The future of money on Friday (2 March) Carney (pictured) said: "The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system.

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"At present, crypto-assets raise a host of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions.

"The Bank of England's Financial Policy Committee (FPC) is currently considering the risks posed to UK financial stability."

Carney added the Financial Stability Board (FSB) is set to report to the G20 in Argentina later in March on the financial stability implications of crypto-assets, potentially laying the groundwork for an international approach to its regulation.

Cryptocurrencies are notoriously volatile, with the most notable example Bitcoin falling from a 2017 high of $20,000 to a 2018 low of $6377 in early February. At the time of writing Bitcoin is valued at $10,875.

Governments around the world, notably China, have already moved to clampdown on cryptocurrencies, with some banning it outright.

Late in 2017, the FCA took action with pan-European regulator ESMA to prevent consumer harm arising from intial coin offerings, which proliferated in popularity over 2017.

In February the Treasury Committee launched an inquiry into the role of digital currencies in the UK with the view to regulating the emerging asset class.

The inquiry will examine the potential impact of the technology on financial institutions and infrastructure, and how regulation can provide protection for consumers and businesses without "stifling innovation".

Carney said, in his view: "crypto-assets do not appear to pose material risks to financial stability.

"This is in part because they are small relative to the financial system. Even at their recent peak, their combined global market capitalisation was less than 1% of global GDP.

"In comparison, at the height of the dotcom mania, the valuations of technology stocks were closer to about a third of global GDP.

"And just prior to the global financial crisis, the notional value of credit derivative swaps was 100%.

"In addition, major UK financial institutions have minimal exposures to the crypto-asset ecosystem."

However, he added: "Financial stability risks could rise if retail participation significantly increased or linkages with the formal financial sector grew without material improvements in market integrity, anti-money laundering standards and cyber defences."

Carney also outlined some of the potential advantages of cryptocurrency, the underlying technologies of which he described as "exciting".

He added: "Whatever the merits of cryptocurrencies as money, authorities should be careful not to stifle innovations which could in the future improve financial stability; support more innovative, efficient and reliable payment services as well as have wider applications."

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Jo Torode, a senior financial crime lawyer at Ropes & Gray, agreed with Carney, adding "the key to successful regulation of cryptocurrencies is to ensure that regulation does not stifle innovation".

He said: "Appropriate regulation would for the first time offer legal and regulatory protection to individual investors and high street customers seeking to benefit from the opportunities presented by cryptocurrencies, and the underlying blockchain technology.

"This is the next stage in bringing cryptocurrencies and blockchain within the regulatory framework, speeding up the march towards legitimisation of an asset class that, until a few years ago, many law many enforcement agencies, believed had limited legitimate reasons for people to use.

"Appropriate and thoughtful regulation will facilitate the better exploration of the opportunities that blockchain - the technology underlying cryptocurrencies - offers to the financial services and technology sectors in London, in particular the thriving London fintech market, particularly post-Brexit."