Recession Warning: BoE Official Predicts 2008-Level Economic Crash Due to Bitcoin and Crypto | Personal Finances | Finance
Earlier this week, Sir Jon Cuncliffe, the bank’s deputy governor for financial stability, expressed concern over the rise of non-backed and backed cryptoassets. Specifically, the financial expert warned that failure to regulate currencies such as Bitcoin could lead to a devastating economic crash. Sir Jon drew a direct comparison between the growing popularity of cryptocurrency and the boom in the US sub-market mortgage market, which exacerbated the economic crisis more than a decade ago.
In 2021 alone, cryptocurrencies rose around 200% to around $ 2.3 trillion (£ 1.7 trillion) from $ 800 billion (£ 528 billion) in the year former.
Both bitcoin and the Ethereum cryptocurrency declined significantly in value earlier this year, but both assets have recovered in recent months and are at all-time highs.
Currently, the value of a single Bitcoin stands at $ 56,000 (£ 41,000) today, up from $ 700 (£ 513) five years ago.
Over the past two years, Sir Jon has analyzed and monitored the exponential growth of crypto across the globe as an advisor to the Bank for International Settlements.
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Based in Geneva, this bank is the financial stability council of the G20, as well as the supreme advisory body of central banks.
Now part of the Bank of England, Sir Jon is sounding the alarm on the dangers posed by crypto and Bitcoin if regulations are not put in place.
For many investors involved in crypto, the lack of regulation is its main drawback, but recent developments across the pond suggest that will change soon.
Gary Gensler, the chairman of the Securities and Exchange Commission (SEC) addressed the United States Congress last month and confirmed that the regulator is working on creating a set of rules to manage the crypto market voltaire.
Back in the UK, Sir Jon’s intervention is the latest evidence that financial and regulatory bodies around the world are taking crypto regulation seriously.
In the speech, he said: “The collapse of the $ 1.2 trillion subprime mortgage-backed securities market in 2008 sparked the Great Financial Crisis.
“In this case, the ripple effects of a price collapse in a relatively small market were magnified and spilled over into an unresilient financial system, causing enormous and persistent economic damage.
“Whether a major price correction is absorbed into the system, admittedly leaving some investors with a very headache, or whether it is amplified into a systemic impact, depends on a number of key characteristics of how the asset is integrated into the financial system, especially interdependence and leverage.
“It also depends on the resilience of the system at the time of remediation – the liquidity of the system under stress and the ability of key parts of the system to absorb losses.
“So a necessary thinking experiment from a financial stability perspective is what would happen in the financial system if there was a massive collapse in the price of unsecured crypto-assets – in the extreme, if the price fell to zero.
“Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and the resulting price volatility, the likelihood of contagion between crypto-assets, cyber and operational vulnerabilities, and of course, the power of behavior. gregarious.
“This is because the stress test scenarios that we and other authorities put the banking system through are actually much further from the tail of the probability distribution.
“The financial system is much more resilient today than it was in the recent past, following the reforms put in place in the post-crisis period.
“Of course, that doesn’t mean there aren’t challenges, as the early market disruption of Covid-19 (the ‘Dash for Cash’) reveals.
According to Sir Jon, it took two years to draft the regulatory guidelines drafted by financial bodies that regulate global financial markets.
During this period, crypto trading platforms for these currencies have grown exponentially.
Time will tell if regulators will be able to catch up with the ever-expanding world of Bitcoin and cryptocurrency.