BoE sees echoes of subprime in crypto

The cryptocurrency market is double the size of the subprime debt in the United States on the eve of the 2008 financial crisis and poses a threat unless “urgently” regulated, the Bank of England has warned.

Crypto assets are now worth US$2.3 trillion, about 200% more than at the start of the year. While that’s still a small part of the $250-trillion global financial system, it’s about twice the size of the $1.2-trillion subprime real estate debt market in 2008.

“You don’t have to account for a large proportion of the financial sector to trigger stability problems,” BoE deputy governor Jon Cunliffe said. “When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice.”

The comments mark a shift for the BoE, which along with other banking regulators has brushed off digital currencies as assets without an intrinsic value, which could even go to zero. While Cunliffe repeated that refrain, he also acknowledged the ways that the technology is providing a genuine service that is appealing to more investors. For example:

Major banks are offering digital currency custody services and offering the assets to some wealth-management clients;

As many as 200 specialist crypto hedge funds are now handing the assets, and traditional funds are growing more interested;

Leading payment firms are looking at how to allow consumers to settle in stablecoins.

Those developments, Cunliffe said, are starting to integrate crypto assets into the financial system. Given the increasingly mainstream role that crypto assets are starting to play in the world economy, more vigilance is needed.

“Recording and transferring ownership of assets is the bedrock of the financial system’s role in storing value and in making transactions,” Cunliffe said. “Crypto technology enables — though it does not require — recording and transfer to take place without the banks or custodians that have historically carried out this function.”

He noted that “a massive collapse in crypto-asset prices” is a “plausible scenario”, and that would highlight how assets like bitcoin connect with the rest of the economy.

In the 2008 subprime debt crisis, he noted, “a relatively small market was amplified and reverberated through an unresilient financial system, causing huge and persistent economic damage”.