The Bank of England (BoE) has today issued a letter warning CEOs of banks, insurers and investment firms of the risks associated with crypto-assets.

In a letter titled “Existing or planned exposure to crypto-assets,” Sam Woods, CEO of the BoE’s Prudential Regulation Authority, reminded finance leaders of their obligations with respect to cryptocurrencies, warning that crypto-assets “may give rise to reputational risks.”

While acknowledging that the technologies that underly cryptocurrencies have “significant potential to benefit the efficiency and resilience of the financial system,” the letter nonetheless struck a cautionary tone with respect to crypto-assets themselves:

“In their short history, crypto-assets have exhibited high price volatility and relative illiquidity. Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks.”

Instructing firms to perform the proper due diligence checks if exposed to crypto-assets – the letter also advises that companies should ensure they fully appreciate the technical complexities and risks associated with the new breed of digital asset.

The UK Crypto Industry Responds

CryptoUK – the industry body that represents the country’s leading cryptocurrency platforms – while acknowledging the regulator’s concerns, was keen to point out that the industry is predominantly already compliant – as CryptoUK Chair, Iqbal V. Gandham, explained:

“It is important to stress that the majority of firms within the cryptocurrency sector operate to a high standard, replicating existing models of compliance and best practice for financial services firms. Nonetheless, the concerns raised by the Deputy Governor support CryptoUK’s calls for regulation, set at an appropriate level that allows firms operating within the sector to grow and flourish.”

Stressing the enormous potential of the UK’s crypto economy, Gandham also emphasised the need for a clear regulatory framework:

“Currently, the risks from cryptocurrencies largely stem from low levels of consumer knowledge and a lack of an appropriate regulatory framework surrounding them. The UK has the potential to become a world leader within the crypto economy. We urge governments and regulators to ensure that the UK is well-positioned to seize the opportunities that this sector could bring.”

This aspect echoes CryptoUK’s call in May for the Treasury to institute a proper regulatory framework – with the body proposing several steps to help shore up the space.

While it remains to be seen how UK regulators will adapt to the changing crypto landscape, many within the space will hope that a pro-active relationship with the industry itself can be established.

Featured Image Credit: “Bank of England / Threadneedle St.” by “George Rex” via Flickr; licensed under “CC BY 2.0”