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FTX collapse shows crypto is ‘too dangerous’ not to regulate, Bank of England deputy governor says | Business News


The Bank of England deputy governor has warned cryptocurrency trading is “too dangerous” to be outside of mainstream financial regulation and could cause “a systemic problem” if no action is taken. .

Speaking for the first time since the founder of the crypto trading platform FTX was arrested and charged with major fraud, Sir Jon Cunliffe told Sky News Bank is considering regulation to protect retail investors in crypto-trading “casinos” as well as the broader financial system from potential crypto shocks.

Sam Bankman-Fried to be Extradition on Wednesday from the Bahamas to the United States, where he will appear in a New York court charged with eight counts of fraud, money laundering and campaign finance violations.

The collapse of FTX left more than a million customers unable to withdraw assets worth an estimated $8 billion.

Prosecutors allege he used FTX client funds to cover losses for his private crypto hedge fund Alameda Capital in what the company’s new chief executive told Congress was “a failure old-fashioned embezzlement”.

An estimated 80,000 FTX customers are based in the UK, with personal debts amounting to £5 million in lifetime savings, according to a lawyer representing dozens of victims.

Louise Abbott, a crypto scam expert, told Sky News: “These individual investors have invested anything from a few thousand pounds to around £5 million, huge amounts of money, all are completely frozen, I will use the word freeze not lost, because hopefully something will be returned to them at some point.But this is huge amount of money. , huge amounts of money are lost or trapped, or frozen over time.”

Cryptocurrency Reliability

This incident is a major blow to the reputation of cryptocurrencies, digital assets whose value comes not from state support, but from the relative scarcity and willingness of investors to trade. other investment.

Mr. Bankman-Fried has built relationships in Washington and Wall Street, earned millions in political donations and attracted prominent investors to his platform.

His demise highlighted the volatility of crypto investment and the lack of regulation in an industry that, despite widespread skepticism, is drawing increasing attention from the financial mainstream. .

Regulatory efforts

In the United Kingdom, regulators have tried and failed to impose their orders on overseas crypto exchanges, while the government has a target, set in September. 4 by Rishi Sunak when he was prime minister, to make the UK a “global crypto-asset hub”, an ambition that depends largely on effective regulation.

Sir Jon, the deputy governor responsible for financial stability, told Sky News that the Bank’s regulatory efforts are aimed at protecting individuals and maintaining financial stability.

Bank of England Deputy Governor Jon Cunliffe speaks during the Bank of England's financial stability report at the Bank of England in central London on June 27, 2017. / AFP PHOTO / POOL / Jonathan Brady (Credit must-read photo JONATHAN BRADY / AFP via Beautiful images)
Picture:
Bank of England Deputy Governor Jon Cunliffe

“There is a lot of activity that has developed in the last 10 years about trading and selling crypto assets, which do not have any intrinsic value, so they are very volatile,” he said. And all of that has grown out of regulation.”

“What we see in FTX… is some activity in the regulated financial sector that should have certain safeguards in place. We see things like customer funds appear to have gone missing, conflicts of interest between different operations, transparency, audits and accounting. All the perhaps boring things that happen in the conventional financial sector, don’t actually happen in that set of activities. And as a result, I think a lot of people have lost a lot of money.”

Comparing crypto trading to casinos, Sir Jon said investors who want to speculate can do so without the risk of losing access to their funds.

“It’s really a gamble in my opinion, but we do allow people to place bets, so if you later want to get into that game, you should be able to stay in a regulated place. the same way you would gamble in a casino it’s regulated. You should have full information on the tin about what you’re doing.”

Banks must also address the risk to financial stability that may flow from digital assets as institutional investors and banks explore the possibility of exposure to crypto assets estimated to be worth 1 trillion dollars.

“This trading of crypto-assets is not large enough to destabilize the financial system, but it is starting to develop links with the financial system,” said Sir Jon. “I don’t know how that will develop. But we have banks, hedge funds and other people who want to invest in it. I think we should think about regulation before it gets integrated with it. financial system and before we can have a potential system problem.

“So I don’t think it can be said that this can be kept outside of the financial system. It’s too dangerous. I think it’s very difficult but it’s safe to say, let’s put it in, where and when they’re going to be. I think we can manage risk by the standards we’re used to.”

Potential for blockchain

While cryptocurrencies have demonstrated constant volatility since the advent of Bitcoin 14 years ago, the underlying technology, blockchain, is seen as having significant potential across industries for data management, increasing speed and simplify transactions.

Blockchain provides proof of transactions on a public record known as a distributed digital ledger.

Each new crypto exchange is recorded on a “block” added to the “chain” containing details of the new and previous transactions, meaning it can only be forged by changing all previous links.

The system is maintained and monitored by every computer connected to the network rather than a central monitoring entity.

Mercedes is exploring the potential of blockchain for data management enabling autonomous driving, while Vodafone is exploring its utility in managing billions of microtransactions that will be powered by the next generation of internet technology.

‘Smart money’ could also simplify global supply chains, with the prospect of microtransactions using stable tokens linked to individual parts of the manufacturing process.

“There are technologies here that can, and I stress, can, actually be used in the normal financial system, ways to work more efficiently, ways to work that are potentially flexible. more,” said Sir Jon.

“That hasn’t been proven in the crypto world. But if we can provide a regulatory space where people can see if they can develop products using this, then we can get the benefit of some of those technologies.”

Bank of England’s own digital currency

As part of this process, the Bank of England is consulting on plans to develop its own central bank digital currency, an electronic version of the British pound that would offer the same security as sterling, but with digital versatility that could one day replace cash.

“Physical cash will always be provided by the bank as long as everyone wants it and many people depend on it. But it’s not quite usable the way we live today. So the question arises. for the Bank of England is our way as society changes, as we live more digital lives, should we continue to make money available to the public that can be used in a variety of transactions?

“This will be a digital equivalent of ‘I promise to pay the bearer’ promise, which ultimately strengthens confidence in money in the UK. Whenever you want, you can transfer the money you keep in the bank essentially becomes the Bank of England state-guaranteed money with a promise to pay the holder.

“We want to make sure that as physical cash becomes less used in many parts of the economy, we probably need to provide something digital to provide that platform.”

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