Bank of England publishes paper on cryptocurrency and DeFi

The Bank of England has released a new report covering cryptocurrency and decentralised finance (DeFi).

The report from the bank’s financial policy committee said that the “direct risks to the stability of the UK financial system from cryptoassets and DeFi are currently limited”.

However, the report highlighted that “if the pace of growth seen in recent years continues, and as these assets become more interconnected with the wider financial system, cryptoassets and DeFi will present financial stability risks”.

In addition, the report said that “enhanced regulatory and law enforcement frameworks are needed, both domestically and at a global level” as cryptoassets and DeFi adoption grows.

The BoE’s report acknowledged the potential benefits of cryptoassets and related technology, saying they “could reduce the cost, and increase the speed of cross-border payments by allowing transactions to take place directly between individuals (‘peer-to-peer’) and reducing the need for centralised intermediaries”.

The report also said these technologies could pose risks including “financial stability, relating to consumer protection, market integrity, money laundering and terrorist financing” and said that “a crystallisation of risks in cryptoasset and associated markets could lead to a loss of confidence” which it said could “weaken broader trust and integrity in the financial system”.

The BoE said it intends to consult on its proposed regulatory model for systemic stablecoin issuers and systemic stablecoin wallets in 2023, subject to the outcome of HM Treasury’s consultation.

The news comes as more established financial institutions are incorporating cryptocurrency into their business models.

Earlier this month, Goldman Sachs said it had completed its first over-the-counter (OTC) cryptocurrency derivatives trade.

The BoE estimated the total value of cryptoassets worldwide at $1.7 trillion in the first week of March 2022, representing around 0.4 per cent of global financial assets, with over 17,000 different cryptoasset tokens in circulation.

The news comes as the Competition and Markets Authority published a set of recommendations for the future oversight and governance of Open Banking on the same day.

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