The Bank of England (BoE), the UK’s central bank, warned consumers about the risks of using decentralized finance (DeFi) protocols shortly after the exchange collapsed of crypto FTX.
The central bank’s warning came in a speech by Bank of England Deputy Governor Jon Cunliffe at an event at Warwick Business School on Monday. In his speech, Cunliffe advocated including crypto activities in the regulatory framework.
According to Cunliffe, there are three reasons why it is important to regulate crypto-related activities now.
The first reason, according to the central banker, is to protect consumers and investors and to ensure that cryptocurrencies can be traded in “transparent, fair and robust markets”. He clarified that investors who choose to participate in the “highly speculative” crypto market should be able to do so with the same protections they would receive in conventional finance.
The second reason highlighted by Cunliffe was related to financial stability and the need to protect the traditional financial system from the risks posed by cryptocurrencies.
“You don’t have to wait [Krypto] broad and connected to develop the regulatory frameworks needed to prevent a crypto shock that could have a much larger destabilizing effect,” Cunliffe said, suggesting regulators should act sooner rather than later.
Finally, Deputy Governor Cunliffe pointed out that regulation could also be used to encourage new innovations in crypto, and that these innovations could also benefit traditional finance. As an example, he cited smart contracts in DeFi, which had shown they could consolidate trading, clearing and settlement functions into a “single, instant contract” rather than having them executed by different institutions. , as was the case. this is the case in the stock market today.
While acknowledging that the latter proposition may seem “counter-intuitive” to those who see regulation as opposed to innovation, the central bank official clarified that he believes innovation can only thrive in a sound regulatory framework and be introduced on a “large scale”. .
This way we can ensure that the benefits of new technologies and new business models really come from innovation and not from regulatory arbitrage,” the BoE Deputy Governor said.
Advocacy for CBDCs
Cunliff’s speech at Warwick Business School was not the first time he commented on the crypto market and how the government should get involved. Last year, Cunliffe also made the case for central bank digital currencies (CBDCs) in a report for the G20.
“[…] CBDCs offer the opportunity to start with a “clean slate”, Cunliffe said at the time, adding that CBDCs offer the opportunity to avoid “many of the challenges of today’s legacy technologies and processes” related to payments. cross-border.