Financial intermediaries connected to crypto-asset markets risk reputation damage, BoE’s Carney warns
Cryptocurrencies fail to fulfill the traditional roles of money, says Bank of England’s Governor.
As FinanceFeeds has repeatedly warned, cryptocurrencies pose great risks to traders and brokers alike. This stance was echoed today by Mark Carney, Governor of the Bank of England. In a speech, delivered at the inaugural Scottish Economics Conference, Edinburgh University, Mr Carney slammed cryptocurrencies as being incapable of fulfilling the roles of traditional, fiat currencies.
He said that cryptocurrencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. They are failing, however, to fulfill the traditional roles of money.
For starters, he noted that cryptos are poor stores of value – over the past five years, the daily standard deviation of Bitcoin was ten times that of sterling. Moreover, cryptocurrencies are inefficient media of exchange, as, currently, no major high street or online retailer accepts Bitcoin as payment in the UK, and only a handful of the top 500 US online retailers do. In addition, the more heavily used cryptocurrencies face severe capacity constraints compared with other payment systems. For example, Visa can process up to 65,000 transactions per second globally against just 7 per second for Bitcoin, Carney stressed.
On top of that, there is little evidence of cryptocurrencies being used as units of account. The Bank is not aware of any business that accepts Bitcoins in payments that also maintains its accounts in Bitcoin.
With regard to regulation, Carney warned that crypto-assets raise a range of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions. On the brighter side, he said that in his view, crypto-assets do not appear to pose material risks to financial stability, given that they are small relative to the financial system. Even at their recent peak, their combined global market capitalisation was less than 1% of global GDP. Also, major UK financial institutions have minimal exposures to the crypto-asset ecosystem.
Mr Carney emphasized that structural vulnerabilities in cryptocurrencies mean that they are inherently risky compared with traditional financial assets. The risks include extreme price volatility and poor market liquidity due to fragmented markets and highly concentrated holdings, which in turn facilitate manipulation and misconduct. These vulnerabilities are compounded by operational and technological weaknesses, as evidenced by a series of major crypto-asset heists.
“In addition, there is unease that the combination of these vulnerabilities and widening retail participation could damage the reputations of those financial intermediaries connected to crypto-asset markets”, says Mark Carney.
In extreme circumstances, according to him, it could even undermine confidence in the broader financial system itself, particularly if people held an unfounded belief that authorities had legitimised these activities.
He advised that it is about time to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. According to him, holding crypto-asset exchanges to the same rigorous standards as those that trade securities would address a major underlap in the regulatory approach.
And as the SEC and FCA have argued forcefully, so-called initial coin offerings will not be allowed to use semantics to avoid securities laws designed to protect retail investors in particular.
Mr Carney also addressed the possibility of the BoE developing a central bank digital currency (CBDC). He said that “given current technological shortcomings in distributed ledger technologies and the risks with offering central bank accounts for all, a true, widely available reliable CBDC does not appear to be a near-term prospect”.
About a week ago, John Glen, Economic Secretary to the Treasury and City Minister, clarified the stance of the Bank of England regarding digital currencies. He said back then that the Bank does not currently plan to issue a central bank-issued digital currency. However, he said, the Bank is undertaking research to better understand the implications of a central bank issuing a digital currency.