The Bank of England is working on a strict regulatory framework for crypto assets. The Bank of England announced these plans as part of its efforts to prevent the risks to financial stability that the rapid growth of cryptocurrencies could cause.
The global crypto sector flourished in 2021, with the total market cap for the sector growing by 187.5%. There are currently more than 17,000 crypto assets tokens in circulation.
While recognizing the benefits of crypto such as low transaction costs and more choices for users, BOE emphasized the need for effective public policy to mitigate risks, maintain stability, trust, and integrity in the financial system.
The Financial Policy Committee stated that the direct risks to financial stability from crypto assets were currently limited, but the rapid growth in the sector could cause problems in the future.
“The mitigation of financial stability risks from crypto assets and associated markets is essential to ensuring the benefits from new technologies can be realized sustainably,” said the FPC in a statement.
The move to introduce a regulatory framework for crypto assets also comes as concerns about the possibility of Russia using cryptocurrencies to circumvent the financial sanctions imposed following its invasion of Ukraine.
“While crypto assets are unlikely to provide a feasible way to circumvent sanctions at scale currently, the possibility of such behaviour underscores the importance of ensuring innovation in crypto assets is accompanied by effective public policy frameworks to … maintain broader trust and integrity in the financial system,” said the BoE’s Financial Policy Committee in a statement on Thursday.
Crypto assets remain unregulated in the UK as they fall outside the regulatory perimeter in the country. However, the UK’s finance ministry is shining its spotlight on the sector to bring it under the regulation of UK securities laws.
According to the FPC, the regulation of the crypto sector will be based on “equivalence”. Therefore, cryptocurrency financial services that provide similar functions and services to existing financial services will fall under the same regulations.
As the ministry works towards regulating the industry, the Bank of England is focusing on controlling the risks from crypto in the banking sector, as more traditional financial institutions show a growing interest in cryptocurrencies.