LONDON (Dispatches) - The Bank of England (BoE) on Sunday expressed concerns about the impact of cryptocurrencies on financial stability as adoption skyrockets.
In a recent report, the central bank said that digital currencies make up a minute percentage of assets in the country, but with adoption soaring, regulation was needed to protect the economy. Cryptocurrencies have witnessed significant growth this year as the entire market cap of cryptocurrencies stands at over $2.2 trillion.
The Financial Stability Report looked at what the Financial Policy Committee deems the biggest risk to the UK’s financial system and what it was doing to remove or reduce the risks. Aside from cryptocurrencies, it addressed the impact of COVID-19 on the economy, the resilience of the country’s banks in the current financial climate, and mortgage measures. The Bank of England acknowledged that cryptocurrencies could bring many benefits, including reducing payment frictions and inefficiencies. These benefits, however, can only be realized if accompanied by effective public policies that mitigate risks.
The Bank of England believes that digital assets don’t pose a major risk to the UK’s economy. “However, they will present a number of financial stability risks if they continue to grow at their current rapid pace. They become more interconnected with the wider financial system,” it added. Volatility in digital asset prices is one of the BoE’s most significant concerns. It noted in its report that 95% of the existing digital currencies are unbacked and have no underlying assets. According to the central bank, this means they have no intrinsic value and are vulnerable to major price corrections.