Regulate crypto or risk wider crash, says Bank
FTX collapse shows that regulation is needed to protect consumers, says deputy governor
Cryptocurrency regulation is needed to stop the next Ftx-style implosion spilling over into a wider financial crash, the deputy governor of the Bank of England has said. Sir Jon Cunliffe said “these activities and entities” require regulation, including “the need to protect consumers”. The failure of FTX, an offshore digital coin exchange, left one million creditors out of pocket and panicked through cryptocurrency markets, wiping about $100bn from the value of all digital assets in 10 days.
CRYPTOCURRENCY regulation is needed to stop the next Ftx-style implosion spilling over into a wider financial crash, the deputy governor of the Bank of England has said.
Sir Jon Cunliffe said Britain should “continue to bring these activities and entities within regulation”, including “most obviously, the need to protect consumers”.
Offshore digital coin exchange FTX, which just weeks ago had been valued at $32bn (£27bn), collapsed earlier this month leaving one million creditors out of pocket amid allegations it had mishandled customer deposits.
The Bahamas-based cryptocurrency exchange, run by 30-year-old Democrat donor Sam Bankman-fried, had an $8bn black hole in its budget when it filed for bankruptcy two weeks ago.
The failure of FTX has spread panic through global cryptocurrency markets, wiping about $100bn from the value of all digital assets in the past 10 days, according to data from Coinmarketcap, as 130 companies linked to the bust exchange were placed into bankruptcy. Dozens of cryptocurrency companies and investors have found their assets caught up in FTX’S collapse.
Yesterday, shares in publicly listed Grayscale, the world’s largest cryptocurrency fund designed to track the price of Bitcoin, were trading at a 45pc discount to the digital currency, falling a further 5pc in New York. Grayscale owns $10.5bn in Bitcoin, but its value has plunged to $5.5bn.
Grayscale refused to share proof of its cryptocurrency reserves last Friday, blaming “security concerns”. Cryptocurrency companies have been rushing to publish audits of their reserves in an effort to quell investor fears that they are exposed to FTX. Grayscale said: “Panic sparked by others is not a good enough reason to circumvent complex security arrangements.”
Last week, its sister company, Genesis, paused some withdrawals following the collapse of FTX. About $175m of its funds are locked up in FTX. The price of Bitcoin is down by roughly a quarter since FTX filed for bankruptcy on Nov 11, valuing one Bitcoin at just under £13,600.
The cryptocurrency is down 60pc so far this year. Shares in publicly listed Coinbase fell 9pc in early trading yesterday, while 10-year bonds in the cryptocurrency exchange were trading at 50.5 cents on the dollar. Coinbase, which is valued at $9.3bn, said it had exposure of about $15m to FTX.
FTX’S operations were outside the remit of UK regulators, which had refused to authorise it to offer services in Britain.
Sir Jon said that in future those who invested on regulated exchanges should be able to expect the “protections that they would get in conventional finance”.
He said the failure of FTX was “not at present large enough … to threaten the stability of the financial system”, but that future crashes could have wider impacts.
He added: “We should not wait until it is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact.”
The deputy governor said FTX’S failure would not impact the Bank’s work on developing a central bank digital currency to be used alongside sterling.
Sir Jon said Threadneedle Street and the Financial Conduct Authority (FCA) intended to press on with regulating more digital assets, in particular stablecoins – cryptocurrencies with values linked to fiat currencies such as the dollar and the pound.
The deputy governor added that some economists had argued that cryptocurrencies should be left outside of formal financial regulations, since they are too high risk to be properly managed. He said, however, that “people do not fly on unsafe aeroplanes”, arguing new regulation will guide people away from the most dangerous exchanges.
Court filings in the bankruptcy of FTX showed its top 50 creditors were owed $3.1bn from the collapse.
Last Saturday, John Jay Ray, the company’s new chief executive, said the group would pursue a restructuring of its assets and seek a sale of parts of the business. He said some of its divisions were still solvent. The company has hired investment bankers to explore whether they can be sold.