The Bank of England said activity in the crypto market must be addressed as the industry continues to grow.
The bank’s Financial Policy Committee (FPC) briefly addressed cryptocurrencies in its financial stability report on Tuesday. The report noted that while crypto poses a less immediate risk it is nonetheless important to monitor.
In particular, the report pointed to the sharp drop-off in the market's value — which fell below $1 trillion in June from a high of $3 trillion in November. The FPC said that several vulnerabilities, with similarities to previous episodes in traditional finance, were exposed during this decline.
These vulnerabilities included "liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls. Investor confidence in the ability of certain so-called 'stablecoins' to maintain their pegs was weakened significantly, particularly those with no or riskier backing assets and lower transparency."
While the report went on to say that these risks did not pose a threat to the stability of the broader financial markets, it did call for greater regulatory clarity as the industry develops.
“This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities,” the report said.
Stablecoins were then singled out as requiring additional regulation, as "some stablecoins held to be used for payments may not offer similar protections to central bank or commercial bank money."
Such stablecoins hit the headlines in May as TerraUSD – the third-largest — lost its peg to the US dollar, destroying more than $40 billion in value.
The FPC previously set out its expectations for stablecoins which are used as “money-like instruments.” The committee expects these cryptocurrencies to meet “equivalent standards to commercial bank money in relation to stability of value, robustness of legal claim and the ability to redeem at par in fiat.”
The US-UK Financial Innovation Partnership held its third meeting in London last week to discuss crypto and digital asset regulation, ahead of a financial working group meeting between the two nations later this month. The meeting also addressed stablecoins and central bank digital currencies.