The Bank of England has begrudgingly acknowledged the benefits cryptocurrency technology can bring to financial services businesses.
But has warned banks investing in crypto-assets due to the massive volatility in values.
In a letter to Britain’s top banks, investment firms and insurance companies – typically institutional investors – the bank’s deputy governor Sam Woods cautioned against ‘existing or planned exposure to crypto-assets’.
In everyday terms, crypto-assets are digital coins, such as Bitcoin and Ethereum.
In the letter, Woods did not urge the financial firms not to invest in crypto-assets, but cautioned them to take care in the market.
What is the distributed ledger?
“We recognise that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time,” he said.
The distributed ledger or blockchain is secure, irreversible database held on decentralised computers that is the infrastructure underlying cryptocurrencies.
Although asking banks and financial firms to be careful about their forays into cryptocurrency, Woods did highlight some areas he felt were causes for concern, including price fluctuation, illiquidity, fraud, price manipulation, terrorist financing, and money laundering related to cryptocurrencies and assets.
The bank also outlined a framework for managing crypto-assets.
Woods suggests that decisions about crypto-asset investments should be made at board level to ensure any associated risks are properly considered; that staff are not encouraged to risk take by linking remuneration and incentives to crypto-asset investing and that crypto-asset investment risk should be assessed by experts.
Don’t count crypto as currency
“Classification of crypto-asset exposures for prudential purposes should reflect firms’ comprehensive assessment of the risks involved. Although classification will depend on the precise features of the asset, crypto-assets should not be considered as currency for prudential purposes,” says the letter.
“We also expect firms to inform their usual supervisory contact of any planned crypto-asset exposure or activity on an ad hoc basis, together with an assessment of the risks associated with the intended exposure.
“Discussions are ongoing, including amongst authorities internationally, on the prudential treatment of crypto-assets. We will communicate any supervisory or policy updates on the prudential treatment of crypto-assets for banks if deemed necessary, in due course.”