“Crypto-winter” is the term used by experts to describe the recent instability in the crypto markets, marked in particular by the 70% fall in value since November of the most famous digital asset, bitcoin. This valuation crash has also led to a number of failed crypto-related ventures, first and foremost one of Singapore’s big players Three Arrows Capital.
Cunliffe draws the following conclusions from these developments, which it believes will be relevant to both regulators and those involved in the crypto market over the coming years:
- Technology does not change the underlying risks in economics and finance.
- Regulators should continue and accelerate their work to put in place effective regulation of the use of cryptographic technologies in finance.
- This regulation should be built on the iron principle “same risk, same regulatory result”; To be effective, regulatory frameworks must apply a common approach at the international level and be implemented at the national level.
- Crypto – technologies offer the prospect of substantial innovation and improvement in finance. Innovation needs a framework in which risks are managed to flourish.
Technology does not change the underlying risks in economics and finance
Cunliffe believes that new technologies cannot eliminate the risks that are indeed inherent in finance. Crypto technologies could indeed change the management and allocation of risks – including those associated with assets with no intrinsic value, the stability of the settlement asset and the use of leverage – but they do not. will not eliminate. A large number of coins with no intrinsic value present a risk of total loss. Crypto trading platforms face well-known risks arising from the use of leverage. These have already led to various crises that should not be ignored.
Regarding pegged stablecoins, Cunliffe stresses the importance of backing stablecoins with real economy assets so they can function as currency even in the face of declining confidence. The recent collapse of Terra – an algorithm-backed stablecoin supplemented by a Bitcoin reserve – illustrates what can happen when there is a loss of confidence in a “currency” that is not backed by any asset in the world. real economy.
Regulators should continue and accelerate their work to establish effective regulation of the use of cryptographic technologies in finance
The recent crypto meltdowns represent a clear sign that regulators need to continue their work and move the regulation of crypto technologies forward. According to Cunliffe, one cannot conclude that “crypto is over” and that there is nothing to worry about anymore. Even though crypto has not posed systemic risk so far, it could do so in the near future.
He draws a parallel with the so-called “dotcom bubble”, in which the valuation of young tech companies was also highly speculative and eventually collapsed. However, in the long term, these technologies have led to today’s market-leading platforms for internet commerce and a similar outcome is also conceivable for crypto technologies.
“Same risk, same regulatory outcome” and the need for international standards
It’s an oft-repeated regulatory mantra. Regulators should apply regulation to the risks inherent in the provision of a financial service, however it is provided, focusing on the desired regulatory outcome. Cunliffe argues that this is true in the context of cryptography. While existing regulation may not work in this context, or may not be effective in managing risk, the same level of risk mitigation must be achieved by other means to achieve the “same regulatory result”. If it is not possible to mitigate and manage the risk for certain crypto-related activities to the extent necessary through regulation, i.e. to the extent that this risk is managed in other parts of the financial system, Cunliffe advocates not letting business continue. . Such a globally adopted approach has so far prevented, for example, any launch of a systemic stablecoin on a global scale.
For the “same risk, same regulatory outcome” approach to be effective for stablecoins and the global crypto environment, international standards embedded in national frameworks are needed. In the UK, the government will legislate in the current session of parliament to update the powers of the Bank of England and the Financial Conduct Authority to regulate and oversee stablecoins. A consultation on the regulatory framework should then follow later this year. It remains to be seen what impact this national approach will have on the broader regulation and operation of stablecoins.
Innovation and regulation are, in the end, friends, not foes
Cunliffe ends on a positive note regarding the future of crypto and its regulation. According to him, if developed properly, crypto-based technologies could have huge benefits for finance and create lower costs for end investors along with higher speed and better transparency. However, to achieve this, more “crypto-winters” must be avoided to help with the deployment and adaptation of new technologies as well as to build much-needed public trust.
Regulators as well as innovators should be interested in developing appropriate regulation and managing risk. Only in such a framework can they truly flourish and the benefits of technological change be assured. Crypto industry players hope that regulators will take notice and engage so that the potential of these new technologies can be realized.