The Bank of England is drawing up a regulatory framework for cryptocurrencies.
In its latest report on the sector, the bank’s Financial Policy Committee (FPC) evaluated the surge in crypto-assets and DeFi demand in the country, coupled with some of its risks and countermeasures.
The report maintained that cryptocurrencies and DeFi have little relevance and pose “limited” risks” to the current financial stability. However, stability risks may emerge if the space continues to expand rapidly and become more interconnected with the current financial system.
Per the findings, the crypto industry may potentially disrupt financial markets if there is an increase in “interlinkages between cryptoassets and the traditional financial sector,” “growth in activities outside the regulatory parameter,” and many more.
Ergo, the financial regulator will continue to assess the impact of crypto assets on major financial institutions and financial markets, the payment network, and the balance sheet of the real economy. The 40-page report stated:
“The FPC will continue to assess and advise on the regulatory perimeter, consistent with its statutory responsibilities. Any decisions on adapting the regulatory perimeter and framework would be for the Government to take.”
The Bank of England discussed heavily the implications of the continued growth in Decentralized Finance and Stablecoins. While the report acknowledged that DeFi services could replace a range of financial services provided by centralized firms, decentralized technology may not fall under a specific jurisdiction, as such posing severe regulatory hurdles.
For stablecoins, the report mentioned the uncertainty of large fluctuations in the value of stablecoins used in “systematic payment chains” which could give rise to financial stability.
“Although the risks from stablecoins could be pooled together with those of banks, this may not be appropriate given the different business models. And a resolution regime, required may take a number of years to design and implement,” the committee explained.
Therefore, the bank and the Financial Conduct Authority, UK’s financial regulator, plan to work together and present the framework of stablecoins in 2023.