The Bank of England (BoE)’s latest Financial Stability Report, released twice yearly, acknowledges that increased crypto trading action and price volatility in 2021 signal that the sector is harboring “potential pockets of exuberance.”
The report notes that the top market cryptocurrencies, Bitcoin (BTC) and Ether (ETH), saw a sharp appreciation in value over the 12 months to April 2021 and that their subsequent drop by roughly 50% in May has left them “particularly volatile,” with prices skewed to the downside as of last month.
When it comes to the risks all this poses for financial stability, however, the central bank took a relatively sanguine line, noting that spillovers from the 2021 crypto bull run into wider financial markets were limited. The fact that the crypto market remains relatively insulated and confined to retail investors means that the bank does not feel that the risk potentially posed by the sector has begun to crystallize, warranting active intervention, in the words of BoE deputy governor Sir Jon Cunliffe.
The report summarizes the central bank’s position and the likely shifts that would need to occur for this position to change in the future, outlining:
“Market intelligence suggests cryptoassets are largely held by retail investors, with institutional investors having limited exposure at present. However, there are some signs of growing interest in cryptoassets and related services from institutional investors, banks, and key payment system operators. These developments could increase the interlinkages between cryptoassets and other systemic financial markets and institutions.”
BoE governor Andrew Bailey has, however, indicated that the central bank is well aware that the sector and its relationship to the wider institutional financial world are fluid and fast-changing, meaning that the BoE will continue to watch it closely.
The United Kingdom has begun to take a more interventionist approach to parts of the crypto sector, with the country’s Financial Conduct Authority recently ordering major crypto exchange Binance to cease all regulated activities in the country.
Major and rapid shifts in the private currency landscape — including cryptocurrencies — have also prompted Cunliffe to argue this year that general access to a digital form of central bank money could become crucial for ensuring financial stability in the future.