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The Bank of England is formulating the UK’s first regulatory framework for crypto assets and states that the rapid growth of the sector could bring financial stability risks if left unregulated.
There are rising concerns of crypto being a potential vehicle to evade financial sanctions imposed on Russia after its invasion of Ukraine. As a result, crypto assets are coming under the regulatory spotlight.
“While crypto-assets are unlikely to provide a feasible way to circumvent sanctions at scale currently, the possibility of such behavior underscores the importance of ensuring innovation in crypto assets is accompanied by effective public policy frameworks to… maintain broader trust and integrity in the financial system,” the BoE’s Financial Policy Committee (FPC) said in a statement on Thursday.
Cryptocurrencies like bitcoin and ether are relatively unregulated as they are outside the regulatory ‘perimeter’ and a change of law is needed to bring it within the scope of UK securities rules. This is a step that Britain’s finance ministry is considering.
“This would likely require the expansion of the role of existing macro and macroprudential, conduct, and market integrity regulators, and close coordination amongst them,” the FPC said.
The FPC stated that direct risks to financial stability from crypto are currently limited, but if the current growth rate is maintained, there will be increased risks in the future.
Globally, the sector grew tenfold between early 2020 and November 2021 and now stands at $1.7 trillion – 0.4% of global financial assets, with over 17,000 different cryptocurrency tokens in circulation.
Regulation for the sector should be based on “equivalence”, meaning that crypto-related financial services that perform a similar function to existing financial services should be subject to the same laws, the FPC said.