According to the Bank of England governor, the excitement and popularity of the crypto market may cause a worse financial crisis than the one seen in 2008.
Jon Cunliffe, deputy governor of the Bank of England, warns that the current ongoing crypto mania may eventually lead to a global financial crisis. Cunliffe’s argument is due to the crypto space experiencing such rapid growth in a relatively short span without thorough regulation. The crypto industry exploded from $16 billion in 2016 to $2.3 trillion today.
Cunliffe likened it to the $1.2 trillion subprime mortgage market of 2008. This was a well-documented global financial crisis from debt spillovers that crippled the institutional markets and several assets. Just like today’s crypto asset market, that period also witnessed rapid development across the financial space, with proper checks and balances lagging. Cunliffe said:
“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice.”
Although the 2008 meltdown involved mainstream financial assets, Cunliffe emphasized that crypto assets pose bigger financial stability concerns. This is because the majority of participants are not well-versed enough to make sophisticated decisions with crypto investments. In Cunliffe’s words they, “have no intrinsic value and are vulnerable to major price corrections.” He further stated many of these financial risks remain limited now, but will not be for long – unless there is proper regulation. He added:
“The crypto world is beginning to connect to the traditional financial system and we are seeing the emergence of leveraged players. And, crucially, this is happening in largely unregulated space.”
Cunliffe believes that the risk to financial stability could increase rapidly if market expansion continues to occur at such a pace. However, how quickly governments and regulators move in instituting an effective overview would determine how large or small the risks involved.
Volatile Nature of Crypto Is What Makes It a Financial Crisis Threat
Bitcoin and Ethereum, the two most prominent digital currencies, slipped by over 30% in value earlier this year. The price of Bitcoin alone has fallen 10% in a single day on almost 30 occasions within the past five years. Furthermore, Cunliffe pointed out that BTC once plummeted nearly 40% after a cyber incident in Seychelles.
Although both Bitcoin and Ethereum have made significant recoveries, the price movements show how volatile crypto can be. Price is highly susceptible to a variety of factors and external influences. These could be as ‘benign’ as a tweet from Tesla CEO Elon Musk, or as aggressive as China’s regulatory crackdown.
Despite his ominous warning, Cunliffe also advised governments and regulators to exercise sound judgment in their approach. He stressed that they must be careful not to overreact or term new approaches “dangerous” just because they are different. He also added that crypto technologies could radically improve the financial sector.
Several regulators across the globe are already establishing public policy regulatory frameworks in place. This is in a bid to competently manage the exponential growth of crypto assets. However, Cunliffe advises that the regulators should expedite the process.