Bank of England sketches out first regulatory approach to crypto

The Bank of England has started sketching out Britain’s first regulatory framework for cryptoassets, saying that although the sector remained small, its rapid growth could pose risks to financial stability in future if left unregulated.

Cryptoassets have come under the regulatory spotlight amid concerns they could be used to circumvent financial sanctions imposed on Russia since its invasion of Ukraine.

“While cryptoassets are unlikely to provide a feasible way to circumvent sanctions at scale currently, the possibility of such behaviour underscores the importance of ensuring innovation in cryptoassets is accompanied by effective public policy frameworks to... maintain broader trust and integrity in the financial system,” the BoE's Financial Policy Committee (FPC) said in a statement .

Cryptoassets, such as bitcoin and ether, are largely unregulated as they fall outside the regulatory 'perimeter' and a change of law would be needed to bring them under the full scope of UK securities rules, a step Britain's finance ministry is looking at.

“This would likely require the expansion of the role of existing macro and microprudential, conduct, and market integrity regulators, and close co-ordination amongst them,” the FPC said.

The FPC said direct risks to financial stability from crypto were currently limited, but if the recent pace of growth is maintained, there would be risks in future.

The sector globally grew tenfold between early 2020 and November 2021, and now stands at $1.7 trillion or 0.4 per cent of global financial assets, with over 17,000 different cryptoasset tokens in circulation.

Regulation for the sector should be based on "equivalence", meaning that crypto-related financial services that perform a similar function to existing financial services should be subject to the same laws, the FPC said.

Until cryptoassets are brought fully under the regulatory net, the BoE is focusing on ensuring that risks from crypto are controlled in the banking sector. The Financial Conduct Authority on Thursday told firms they must fully explain to consumers the risks from unregulated crypto.

Regulators across the world are also trying to grapple with cryptoassets and their offshoots.

Stablecoin conditions

BoE Deputy Governor Sam Woods wrote to lenders on Thursday, noting increasing interest from banks and investment firms in the sector. Risks from crypto should be “considered fully” by the boards of banks and they would likely need to adapt their existing risk management strategies and systems, Woods told them.

“We would also expect firms to discuss the proposed prudential treatment of cryptoasset exposures with their supervisors,” Woods said in reference to the amount of capital needed to cover any losses.