Financial regulations should be extended to crypto before the industry becomes large enough to potentially threaten broader financial stability, according to Jon Cunliffe, deputy governor of the Bank of England.
Speaking at the Association for Financial Markets in Europe (AFME) conference, Cunliffe said there was a need to ensure that new approaches to trading and settlement deliver the same level of resilience that regulators expect from the existing system.
He added, “There is simply no time to identify or rectify errors before they are actioned. In short we may not want wholly instantaneous trading and settlement in all markets,”
Instantaneous settlement means that cash and securities must be in place at the time a trade is struck, and it was unclear how blockchain based platforms and existing technology would work with each other, he said.
Cunliffe has previously said that regulators should accelerate efforts to establish clear rules for crypto. The crypto market turned heads when it reached nearly $3 trillion in market capitalisation last year.
Currently, stock and bond trades are settled two business days after the transaction takes place, creating risky exposures and potential for big market moves in the meantime, which banks must cover with cash for margin and capital.
The US has set a March 2024 deadline for cutting this to one working day, putting pressure on Europe to follow suit.
There are already pilot programmes for using distributed ledger technology or blockchain for instant trading and settlement of trades to cut costs and risks.
At the conference, he said, “Regulators need to begin extending existing standards and regulatory regimes to crypto before, not after it becomes systemically important.”
He added, “And done carefully, the development of regulatory regimes helps, not hinders, innovation by reducing the risks of confidence destroying crashes and by giving innovators a framework within which to innovate.”
The crypto markets tumbled from their peak last year to the current $927 billion after a series of crypto firms such as stablecoin issuer Terra collapsed earlier this year.
