Bank of England Deputy Governor: The scale of the cryptocurrency industry is twice that of the subprime mortgage crisis, good regulation is like an excellent mousetrap, driving financial progress

The Deputy Governor of the Bank of England, Jon Cunliffe, gave a speech on the 13th discussing the current cryptocurrency industry's growing connections with traditional financial systems and offering insights on how regulatory bodies should address its rapid development.

Do Not Stifle Innovation

Jon Cunliffe began his speech by pointing out that the market value of the cryptocurrency industry has reached $2.3 trillion, which is double the size of the 2008 subprime mortgage bond market. While it represents only a small fraction compared to the $250 trillion global financial system, past experiences tell us that even in a smaller market, the chain reaction of price crashes can still cause significant and lasting economic losses to the financial system that lacks flexibility.

However, the emergence of new technologies and new participants can address long-standing frictions and inefficiencies, and reduce entry barriers.

"When faced with unfamiliar things, be careful not to overreact. Throughout history, they have been crucial in driving financial service reform and enhancing resilience." Jon Cunliffe said.

Concerns About Frequent Corrections and High Volatility

Jon Cunliffe believes that the value of cryptocurrencies is too unstable, with Bitcoin's price fluctuations being 12 times more extreme than the S&P 500 index. Furthermore, the frequency of Bitcoin's daily declines exceeding 10% is very high, with situations even approaching a 40% decline in a single day. However, the proportion and amount of the British population investing in cryptocurrencies are increasing.

From a financial stability perspective, it is necessary to be concerned about the unlimited downward price of unsecured crypto assets like Bitcoin. A severe decline in crypto assets could lead investors to add margin to leveraged positions, forcing leveraged investors to liquidate other assets to meet demands, resulting in the sale of other assets and generating spillover costs to other markets.

Jon Cunliffe on the risks posed by cryptocurrency volatility:

Although severe price adjustments currently do not pose financial stability issues, under similar conditions, with the rapid growth of the cryptocurrency industry market value, this situation may not be sustainable for too long.

Views on Stablecoins and DeFi

Jon Cunliffe's views on stablecoins and DeFi are quite similar to those of U.S. SEC Chairman Gary Gensler. As the stablecoins currently circulating in the market are usually backed by commercial paper, short-term securities, and cash, it may create redemption risks and liquidity issues. The DeFi industry is too complex and opaque for traditional financial institutions and ordinary investors, lacking investor protection, anti-money laundering, and other market integrity provisions, requiring urgent regulatory oversight.

Confidence in Cryptocurrency Regulation

Although Jon Cunliffe raised many issues in the cryptocurrency industry, he also believes that well-designed standards and regulations can effectively manage risks in the crypto world, just like in the traditional financial world.

Establishing standards and regulations for public policy frameworks will undoubtedly face a tough and cautious process, but it is urgently needed to be addressed, as Jon Cunliffe stated:

Throughout history, technology and innovation have driven progress in the financial industry. Cryptographic technology offers excellent opportunities, as Edison said: "If you can make a better mousetrap than other people, the world will beat a path to your door." But it must be a truly better mousetrap, not just one that operates to lower standards or no standards at all.