In its latest report, published on July 5, the Bank of England notes the deterioration of global economic conditions and the cloudy prospects for its own economy. Focusing on the extreme volatility of the cryptocurrency market, the BoE insists on stricter regulation of digital assets.
A new report from the British regulator focuses on financial instability and deterioration of the growth prospects in the United Kingdom and worldwide. One of the main reasons for this situation is the illegal Russian invasion of Ukraine. It has led to tangible increases in energy and food prices, tighter financing conditions, and a tense atmosphere for both people and businesses.
The vulnerable crypto market requires a robust regulatory framework
High volatility and dropping asset values are key characteristics that reflect the current situation in the global crypto market. Thus, while the market capitalization of digital assets at the end of last year was around $3 trillion, it now reaches only $900 million.
According to the report, vulnerabilities previously specific to the cryptocurrency market have begun to emerge in “more traditional parts of the financial system”. These include liquidity mismatches, which contribute to unstable launches and sales, artificial amplification of asset price collapses, and using borrowed funds to promote certain currencies.
The declining investor confidence in stablecoins has also been noted. Many digital currency holders have become wary of this asset class, especially if there is a lack of transparency or potentially risky collateral. The TerraUSD algorithmic stablecoin crash has played a significant role in this.
Despite the cloudy prospects for the crypto market, this situation does not affect the financial stability of the UK. But given the possible wider distribution of digital assets and the formation of their close connection with the traditional financial system, the regulatory framework needs to be strengthened. Only strict regulation will enable a quick reaction to market fluctuations and protect investors.
The Ministry of Finance plans to transfer stablecoins to the BoE’s purview to achieve this result. Consultations on the transaction and subsequent regulation of digital assets are due to take place soon.