Is The Global Rise of Crypto Putting Financial Systems at Risk?

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A recent speech by a high-ranking member of the Bank of England states that the growth of Bitcoin and other cryptocurrencies could have major consequences in the near future.
It’s not the first time that the cryptocurrency markets are experiencing sharp falls in value; however, this latest drop could be one of the most significant.

This is because someone high profile has now come out and recognized what many people already know – cryptocurrencies like Bitcoin are here to stay, and they’re only going to grow with time.

No surprise that it was bad news for cryptocurrency traders when Bank of England Governor Mark Carney gave a speech saying cryptocurrencies pose serious risks to global financial stability.

The price of Bitcoin dropped 10% following his comments, while Ethereum also fell by 9%. However, you might ask yourself exactly why Mr. Carney decided to make these comments which had such an effect on the prices of popular cryptocurrencies?

Speech From Bank Policymaker Voices Concern Over Bitcoin Stability


Bitcoin predictions are nothing new. Over the years, there have been many predictions that Bitcoin will either crash to zero and fade into memory or get so big that it takes over the world’s financial systems. These kinds of analyses have mostly come from pundits or online sources that are far from reputable, but this latest prediction comes from a senior Bank of England policymaker.

Deputy Governor Sir Jon Cunliffe has stated that there is reason to believe that Bitcoin and other cryptocurrencies could rapidly become a threat to the stability of global finance. In fact, he stated that the impact of Bitcoin could be similar to the fallout of the 2008 global financial crisis.

Sir Jon addressed these concerns in a speech given at the SIBOS conference on October 13th, 2024. The annual SIBOS conference is hosted by the Society for Worldwide Interbank Financial Telecommunication and focuses on topics in both finance and banking.

Cryptocurrencies Show Potential for Major Economic Impact


Among the most serious concerns voiced by Sir Jon is the unprecedented and alarming growth of cryptocurrency markets. Over the course of 2024, the value of all cryptocurrency assets has more than doubled to a current value of $2.3 trillion.

Sir Jon noted that this value still pales in comparison to the size of the global financial system, around $250 trillion, but that there is still serious cause for concern. The 2008 financial crisis was triggered by sub-prime mortgages, which were valued at just $1.2 trillion.

He likens the two areas because both are examples of the rapid growth of largely unregulated assets. Just as the sub-prime mortgage market grew without effective oversight, so grows Bitcoin and cryptocurrencies today.

Despite these concerns, Sir Jon stated that cryptocurrencies are an area rich with potential. The overall theme of his speech is that effective regulation is necessary to prevent catastrophic financial events and that the regulation is needed sooner rather than later.

Continued Volatility of Unbacked Cryptocurrencies a Major Risk


Unbacked cryptocurrencies are by far the majority, making up almost 95% of total crypto value. Unbacked means that there is nothing behind the coin. It simply stands on its own. This is similar to regular fiat currencies like the US dollar. Years ago, every dollar was backed by a dollar’s worth of gold held by the government, but that time has long passed.

Unbacked cryptocurrencies similarly have nothing tangible behind their value. Most cryptocurrencies are unbacked, including Bitcoin and thousands more. These are the cryptocurrencies that show massive volatility and are more speculative investments than actual means of payment.

During his speech, Sir Jon cited a major price correction of unbacked cryptocurrencies as the most substantial threat posed by crypto in general. He notes that drops of 10% in a single day are not uncommon and that the largest daily drop has been nearly 40%. If crypto markets continue to grow at their current pace, such drops could have dire ramifications for the global financial system.

He also pointed out that leveraged crypto positions are on the rise, which can magnify these dramatic value corrections. Both retail and institutional traders are investing in derivative crypto products, with leverage reaching upwards of 100 times. While these conditions are not a significant threat today, Sir Jon says that this may not be the case for long.

Financial Stability Board Recommends Greater Oversight for Cryptocurrencies


Another area of concern is the lack of any sort of international oversight for cryptocurrencies. Sir Jon notes that the Financial Stability Board (FSB), an international body that monitors and makes recommendations about financial stability, has recommended greater oversight, including anti-money laundering controls and consumer protection measures.

He says that these kinds of protections are in line with current financial system requirements and should be in place in order to prevent problems like those seen in 2008. He also pointed out that many countries have already begun implementing some level of regulation within their own borders, but he again stressed the need for strong global coordination on this issue before it becomes too big to control.

Require Increased Regulation


Sir Jon also spoke on the viability of stablecoins. These cryptocurrencies are backed by some other asset, typically fiat currencies like the US dollar. The most notable example is Tether, which is backed 1:1 by a reserve of US dollars. It remains incredibly stable, varying day to day by thousandths of a cent.

Stablecoins are a very small part of the cryptocurrency market, but new stablecoins and methods for implementing them are starting to emerge. While these cryptocurrencies present a more viable option for use as an actual payment method, Sir Jon notes that effective regulations would have to secure those methods.

Additional regulation is also required to protect investors from a variety of investment or pyramid schemes like 1K Daily Profit. Any website which offers “guaranteed returns” is most likely a scam according to review website

Government Must Implement Effective Regulations to Use Crypto Effectively

The overall message that Sir Jon imparted through his speech is that cryptocurrencies can provide a number of benefits to society but that there are significant risks as well. Despite the decentralized nature of cryptocurrencies, he believes that effective regulation can provide a framework in which cryptocurrencies can be used safely.