Top economist calls for cryptocurrency regulation

Chelsea West
March 3, 2018

Cryptocurrencies such as Bitcoin are failing as a form of money and have shown clear signs of being a financial bubble, but their technology could improve the financial system in future, Bank of England Governor Mark Carney said on Friday.

Carney, who was unable to travel to Scotland because of the adverse weather conditions across the United Kingdom, noted "the average volatility of the top 10 cryptocurrencies by market capitalisation was more than 25 times that of the USA equities market in 2017".

Bitcoin, the best known cryptocurrency, soared in value from around $1,000 at the start of 2017 to nearly $20,000 in mid-December, before tumbling below $6,000 last month and then staging a partial recovery.

Instead, he specifically mentioned the need "to hold the crypto-asset ecosystem to the same standards as the rest of the financial system".

He said the use of digital money raised "a host of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and global sanctions".

"In his closing remarks, Carney said that the, ". core technology is already having an impact".

"Isolation risks foregoing potentially major opportunities from the development of the underlying payments technologies", says Carney.

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For now, they posed little financial stability risk to Britain as whole, due mostly to major banks' limited involvement with them. Carney said the central bank would continue to study the use of distributed ledger technology which underlies cryptocurrencies.

Charlie Clarence-Smith, a specialist in digital currencies and their regulation at Pinsent Masons, the law firm behind, said that he agreed with Carney's assessment.

Carney addressed the 2018 Scottish Economics Conference in London.

The inquiry will assess how the government and financial services regulators such as the Financial Conduct Authority (FCA) and the Bank of England can create an environment to protect consumers, without holding back innovation.

He said financial stability risks would only rise if retail participation significantly increased or linkages with the formal financial sector grew without material improvements in market integrity, anti-money laundering standards and cyber defences.

Threadneedle Street has been studying the risks posed to United Kingdom financial stability by bitcoin and other digital currencies, as well as the potential uses of the technology underlying them, for several years. Many investors in crypto-currencies were from a generation that did not have first-hand experience of the 2008 financial crisis, he added.

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