Bank of England Deputy Governor Raises Warnings to Institutions Regarding Cryptocurrency Risks

Earlier this week on Thursday, June 28, deputy governor of UK’s central banks and the head of Prudential Regulatory Authority (PRA) - Sam Woods has issued warnings to financial institutions regarding their exposure to the digital currency assets.

In an official letter , Woods mentions that all the investment firms and insurance companies should take all the necessary steps needed to protect themselves from the extremely unpredictable and volatile investment vehicles in the cryptocurrency space.

PRA is UK’s financial service regulator and Woods wrote to the CEOs of the financial firms that the agency recommends them to recognize that crypto assets “represent a new, evolving asset class with risks which should be considered fully by the board and highest levels of executive management”.

"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. Entering into activity related to crypto-assets may give also rise to reputational risks. Firms’ remuneration policies and practices should ensure that the incentives provided for engaging in this activity do not encourage excessive risk-taking.”

The letter also hints financial institutions to minimize their exposure to the crypto space and thus reduce the possible risks associated with crypto trading. It also asks institutions to have a PRA-approved Senior (Insurance) Management Function auditor review and determine the risk assessment framework while dealing with digital assets.

The PRA said: “an individual approved by the PRA to perform an appropriate Senior (Insurance) Management Function (S(I)MF) should be involved actively in reviewing and signing off on the risk assessment framework for any planned business direct exposure to crypto-assets and/or entities heavily exposed to crypto-assets. Firms should make their usual supervisory contacts aware of the responsible individual.”

The deputy governor has also denounced the idea of using digital currencies as a regular means of payment or daily money saying "crypto-assets should not be considered as a currency for prudential purposes.”

However, Woods in his letter goes to acknowledge the distributed ledger technology (DLT) popular as the blockchain technology that supports the working of digital currencies. Woods said: "We also recognize that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time."