Bank of England warns of cryptocurrency risks

Fast-growing cryptocurrency assets could pose a danger to the established financial system, a senior Bank of England official told the BBC.

Although not much of the UK household wealth is currently held in assets like Bitcoin, they are becoming more common, said the Bank’s Deputy Governor Sir Jon Cunliffe.

If its value falls dramatically, it could have a ripple effect, he said.

The Bank must be prepared to contain those risks, he added.

Speaking to the BBC’s Today show, Sir Jon said that around 0.1% of UK household wealth is currently in cryptocurrencies.

An estimated 2.3 million people had them, with an average per person of around £ 300.

However, he emphasized that cryptocurrencies had been “growing very fast,” and people like fund managers wanted to know if they should keep part of their portfolios in crypto.

“Their price can vary considerably and, theoretically or practically, they could go down to zero,” he said.

“I think the point where you worry is when you integrate into the financial system, when a big price correction could really affect other markets and affect the established players in the financial market.”

“It is not there yet, but it takes time to design standards and regulations.”

He added: “We really have to roll up our sleeves and move on, so that when this becomes a much bigger problem, we have the regulatory framework to contain the risks.”
Sir Jon spoke the day after the Bank released its latest Financial Stability Report, which examined the health of the UK financial system.

The report said UK households had remained “resilient” despite the end of the licensing scheme and other supportive measures from Covid.

However, he added that uncertainty about health risks and the economic outlook remained.

Covid could still have “a bigger impact” on the economy, especially in light of new variants, he said.

The report comes as the Bank’s policymakers prepare to announce their next decision on interest rates on Thursday.

The cost of living increased 4.2% in October, its highest rate in almost 10 years. This surge in inflation has led analysts to predict an increase in interest rates from their current all-time low of 0.1%. But recently doubts have been raised due to the spread of the Omicron variant.
“The UK and world economies have continued to recover from the effects of the pandemic. But uncertainty remains about the risks to public health and the economic outlook,” the Bank said.

“For example, there are short-term pressures on supply and inflation, and Covid could have a greater impact on activity, especially given uncertainties about whether new variants of the virus reduce the efficacy of the vaccine.”

The Bank of England’s financial stability committee said risks to the financial system had returned to their levels before the pandemic began.

“The UK’s leading banks are strong enough to continue to support households and businesses, even under severe scenarios,” the Bank said.

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He is consulting on lifting the emergency measures introduced to give banks more room for maneuver at the beginning of last year.

Banks will now once again have to build up an additional capital buffer to protect themselves against future shocks, worth 1% of all their loans (known as a countercyclical capital buffer). That will increase to 2% next year.

The Bank is also consulting on the relaxation of affordability limits for mortgages.

It is examining the possibility of removing the requirement that lenders test whether borrowers would still be able to pay repayments if interest rates rose 3% above the standard variable rate.

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