A top policymaker at the Bank of England has warned that digital currencies such as bitcoin might cause a financial collapse if governments do not impose strict controls on the industry.
Sir Jon Cunliffe, deputy governor of the Bank of England, compared the rise of cryptocurrencies to the soaring value of US subprime mortgages prior to the 2008 financial crisis and warned that the financial markets may be shaken by a similar occurrence in the coming years.
Although the value of Bitcoin and Ethereum fell earlier this year, they have now rebounded to near all-time highs. Compared to today’s value of $56,000, a single bitcoin was worth around $700 five years ago. Since July, the value of Ethereum has nearly doubled to $3,500.
The Bank of International Settlements in Geneva and the G20’s Financial Stability Board have both relied on Cunliffe as an advisor to keep track of cryptocurrencies in recent years.
His warning, coming from a former Whitehall mandarin well-connected in political and central bank circles, is sure to get the attention of senior Treasury officials in the UK, the United States, and Japan. He’s not alone.
The value of cryptocurrency coins has climbed from $16 billion five years ago to $2.3 trillion this year, a 200 percent increase.
Though Cunliffe said the financial system has improved since 2008 and governments should be cautious about overreacting to financial advances, traders using digital currencies should be alert since those currencies may become worthless in an instant, he added.
To put $2.3 trillion into perspective, consider that the global banking system is worth $250 trillion.
Sub-prime mortgages were worth around $1.2 trillion at the height of the financial crisis, which demonstrated that a small percentage of the financial sector can cause serious problems with financial stability.
Low-income people in the United States used mortgages with ultra-low interest rates to encourage speculation in sub-prime mortgages.
There is evidence that speculators have begun borrowing money to buy crypto assets, increasing the potential of a crash affecting the entire financial system, according to Cunliffe’s report.
Currently, assessments indicate that just roughly $40 billion in borrowed monies is backing cryptocurrency expenditures.
However, there was evidence that traders were increasingly betting on digital currencies’ future values.
There is currently $2 billion worth of crypto purchases being made every day by dealers on the Chicago Mercantile Exchange (CME).
There is little fundamental value in the majority of these assets, making them extremely volatile.
Leveraged players are beginning to emerge in the crypto sector as it becomes more integrated with the traditional financial system. But most importantly, this is occurring in the mostly unregulated territory, according to him.
“If this region develops and expands at the rate I foresee, financial stability risks are currently low, but they could grow dramatically in the future.” He went on to say, “How big such risks grow will be in part determined by the form and pace of regulatory and supervisory agencies’ response.”
Also, the necessity to set standards in “a tedious, rigors procedure” clashed with the rapid expansion of digital commerce.
As a result, trading platforms for digital currencies have grown by a factor of sixteen in the time it took the bodies that oversee global financial markets to publish recommendations.