On 21 November 2022, the Bank of England (the Bank) published a speech by Jon Cunliffe at Warwick Business School’s Gilmore Centre Policy Forum Conference on Defi and Digital Currencies. In his speech, Mr Cunliffe reflects on recent crypto market developments and the work the authorities are doing on the regulation of crypto stablecoins and the Bank’s work on a potential central bank digital currency.
To start, Mr Cunliffe takes a look at the collapse of trading platform, FTX, and its associated businesses, and makes the following observations:
- Although we do not know what has happened exactly, there appears to be some general themes that are very similar to those who regulate and supervise conventional financial firms and financial instruments.
- FTX, along with a number of other centralised crypto trading platforms, appear to operate as conglomerates, building products and functions within one firm. In conventional finance these functions are either separated into different entities or managed with tight controls and ring-fences.
- There are indications that it could have been funding its own crypto coin, FTT, which contributed to the collapse.
Henceforth, following the collapse of FTX, the question has been raised over whether the financial service activities, and the entities that now populate the crypto world, should be brought within the regulatory framework, and, if so, how ? In response, Mr Cunliffe proposes that these activities should be brought within the regulatory perimeter for a number of reasons including to protect financial stability and consumers/investors and foster innovation.
In response to how regulation should be extended to these areas, Mr Cunliffe suggests that the guiding principle should be ‘same risk, same regulatory outcome’, and the starting point should be the existing regulatory framework for investment products, exchanges, payments systems and other financial functions.
Mr Cunliffe moves onto discuss how the regulators should take an open approach and be prepared to explore whether, and if so, how the necessary level of assurance, equal to that in conventional finance, could be attained. This is the approach the Bank is looking to take in the UK for the extension of the regulatory framework to the use of crypto technologies and business models in finance. This is evidenced in the Financial Services and Markets Bill, which extends the current UK regulatory regimes for e-money payment systems to cover the use of ‘stablecoins’ for payments. Furthermore, the powers of the Bill will extend not only to the systems for transferring such coins between parties and to make payments, but to the issuance and storing of the coins. The Bank intends to consult, in detail, on the regulatory framework that will apply to such systemic payment systems and the services, like wallets, that accompany them, next year.
Finally, Mr Cunliffe addresses concerns over whether the collapse of FTX shows that the Bank needs to issue their own digitally native pound. In response, Mr Culiffe argues that there is really is no connection between the collapse of FTX and the Bank’s work on a digital central bank currency (CBDC). The Bank’s work on a CBDC is driven by the trends seen both specifically in payments, including the role of cash, and more generally in the increasing digitalisation of daily life.