BoE Deputy Governor Sir Jon Cunliffe said the collapse of the FTX cryptocurrency exchange showed why regulation was needed more than ever.
Speaking at a conference on decentralized finance and digital currencies on November 21, Bank of England Deputy Governor Sir Jon Cunliffe pointed out that people have been warned.
“Since September, the Financial Conduct Authority” has publicly warned FTX that ‘this firm has been providing financial services or products in the UK without our permission… If things go wrong, you are unlikely to get their money back. .'”
Things have gone spectacularly wrong over the past two weeks, with a run on deposits revealing a massive $8 billion hole in its finances where customer deposits before the cryptocurrency exchange allegedly went to its sister company, trading firm Alameda Research, tried to bail out Giving it money in exchange for FTX’s own FTT exchange token.
While Sir Jon said that all “crypto-assets are highly volatile, given that they have no intrinsic value” – something that much of the crypto industry would dispute, particularly tokens on smart contract blockchains like Ethereum with – was the problem that FTX ran into. that its FTT tokens, which essentially offered trading discounts on the platform, were not only highly volatile but also highly illiquid. This led to a run on FTX deposits when the news broke and traders feared it would not be able to meet the withdrawals, a self-fulfilling prophecy, and went bankrupt a few days later. .
This made Sir John’s case for strict regulation quite difficult to answer. Long-time crypto-skeptics have called for some fundamentals to treat crypto firms more or less like any other financial firms.
He said there are three reasons for this: First, to protect consumers. Second, to protect financial stability that could be threatened by rapidly developing crypto’s links to the traditional financial world. And third, promoting innovation. He added:
“This may seem counterintuitive to those who see regulation as anti-innovation. But as I’ve said before, ‘people don’t fly in unsafe airplanes’. Innovation can start in unregulated places. But it will only be developed and adopted at scale. Within a framework that manages the risks of existing standards.”
He also took aim at the argument that decentralized finance, or DeFi, could solve the problems of unregulated crypto exchanges, allowing lenders and other parts of the system to be effectively managed without centralized control, saying It hasn’t been proven to work yet—or that they’re truly decentralized.
As for the “how”, Sir Jon “jumped back on the guiding principle, saying it should be ‘same risk, same regulatory outcome’.”
Stabilizing the coin
Returning to the part of the speech he had planned before the FTX collapse, Sir Jon said the Financial and Services Markets Bill now before Parliament, “the current Bank of England and FC A regulatory regime is to be extended to e-money. Payment systems to accommodate the use of ‘stable coins’ for payments. It will be guided by the principle of ‘same risk, same regulatory outcome'”.
Which jumps to this liquid collateral issue of FTX. Almost all major stablecoin legislation in the U.S., U.K., EU and other parts of the world requires highly liquid, 100% backed reserves that provide redemption. But they actually need strong security measures as there are no deposit protection schemes.
While the bill covers stablecoin payments, he said the next priority is “enhancing investor protection, market integrity and other regulatory frameworks that govern the promotion and trading of financial products involving crypto-assets.” activities and institutions.” He added:
“At present, in the UK, it is, to a large extent, only the anti-money laundering regulatory framework that applies to these activities and entities.”
The digital pound
To begin with, Sir Jon said he was surprised that people started to argue that FTX was one of the reasons he was moving so quickly on his proposed central bank digital currency.
While he said he did not see how the two were related at first, Sir Jon said on further reflection:
“For some, perhaps the lesson is that the tokenization and digitization of finance should not be in an unregulated space and, moreover, should be underpinned by a robust and reliable digital settlement asset. For others, the message Perhaps that’s a long way from influencing the crypto world and its technologies, let alone changing the way financial services, including payments, are delivered at scale in the real world.”
While the BoE’s report on the digital pound will be out by the end of the year, Sir Jon said, the bank’s position still comes down to two things.
First, given the new tokenized forms of money that are emerging, and the growing trend of using digital cash that cannot be used in an increasingly digital economy, one must ensure The digital pound may require that all forms of digital bank money can be redeemed for cash.
The second is to ensure that competition and innovation around the new functions made possible by tokenized money—smart contracts are an often-used example—and prevent the dominance of digital money by a few big tech firms.
Which, while he didn’t say it, is a problem China’s government apparently seems to be addressing with its digital yuan, or e-CNY, in favor of AliPay and WeChat Pay, which together account for more than 90% of transactions. Covers digital payments.
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