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When something in the financial system is growing rapidly, especially in a largely unregulated area, financial stability authorities must pay attention. Jon Cunliffe stated that governments and regulatory bodies should be cautious not to overreact merely because of the differences in new assets or categorize new practices as "risky." He also pointed out that cryptocurrency technology offers a "fundamental change" in financial services.
He believes that, although the current financial stability risks are still limited, most cryptocurrencies lack intrinsic value and are susceptible to significant price corrections. Therefore, cryptocurrencies pose concerns for financial stability.
The two largest cryptocurrencies, Bitcoin and Ethereum, experienced price drops of over 30% earlier this year, followed by a recovery. They have shown extreme volatility since their inception. Cryptocurrency prices are influenced by various external factors, from statements by Tesla CEO Elon Musk to regulatory crackdowns by Chinese authorities.
Cunliffe said, "The cryptocurrency world is starting to connect with the traditional financial system, and we are seeing leveraged players entering. Moreover, this is happening in a largely unregulated area."
His statements align with those of Andrew Bailey, the governor of the Bank of England, who suggested that cryptocurrency investors should be prepared to "lose all their money" due to the lack of intrinsic value in crypto assets.
Cunliffe stated that if the market continues to expand at this pace, the risks to financial stability may increase rapidly. However, the scale of these risks will depend on the response speed of regulatory bodies. He pointed out that Bitcoin's price has experienced about 30 instances of a single-day drop of 10% in the past five years, with the largest one occurring during the BitMEX liquidation event in March last year when Bitcoin plummeted nearly 40%.
The key questions ahead are what consequences such events will lead to, how the financial system can absorb significant pullbacks in cryptocurrency prices, allow some investors to bear painful losses while avoiding a cascading effect on the real economy. This primarily depends on the interconnectedness and the degree of leverage in the system.
Cunliffe emphasized that these factors were present in the subprime mortgage market before 2008, causing a chain reaction that ultimately led to a global economic collapse. Now, these factors are becoming increasingly apparent in the cryptocurrency space. He stated that regulatory bodies must control the growing risks and ensure that the entire system is resilient to significant pullbacks.
Although crypto finance operates innovatively, Cunliffe argued that with well-designed standards and regulations, risks in the crypto world could be managed, much like risks in the traditional financial world. Many regulatory authorities worldwide have started establishing public policy frameworks to manage the exponential growth of crypto assets, but Cunliffe stressed that it is an urgent matter. He concluded, "From the macro perspective of history, technology and innovation have driven financial improvements. Cryptographic technology provides an excellent opportunity, as Edison said: If you make a better mousetrap than others, customers will come to your home even if they travel a thousand miles."
He added, But it must be a truly better mousetrap, not just one that operates to lower standards or has no standards at all. |
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Post time 5-1-2024 11:04:24