Bank of England’s Financial Policy Committee (FPC) Releases Report On Cryptoassets And Decentralized Finance

report on cryptoassets

Welcome back to the Tribe! In this post we dive into the report on cryptoassets and decentralized finance from the Bank of England!

Nothing should be considered investment or financial advice. Enjoy the ride!

Report on Cryptoassets and Decentralized Finance

The Bank of England’s Financial Policy Committee (FPC) in a report, is assessing the risks and the financial stability implications of cryptoassets and decentralized finance to the financial system. This will provide a future regulatory framework for crypto and decentralized finance.

Bank of England

Per a 40-page report by the Financial Policy Committee (FPC) of the Bank of England, the committee identified the advantages of integrating stablecoins to the existing financial systems.

According to the report on stablecoins:

if appropriately designed, stablecoins could offer lower cost, real-time payments services, while also maintaining a reliable store of value.”

The FPC’s report also proposed that stablecoins could emerge as an alternative to commercial bank deposits, or grow in importance as a means of transacting as DeFi grows. It also projects that in the future returns from stablecoins would surpass, that from bank deposits.

Furthermore, it stated that “If stablecoins that are backed by central bank reserves substantially increase in popularity, then there could be a substantial shift away from household wealth being held as deposits at commercial banks to central bank reserves, via stablecoin providers.”

The future applications of stablecoins, the report highlighted was not limited to deposits, it assessed the role of stablecoins in payments. According to the report:

“Stablecoins could play an increasingly important role in payments. Currently, stablecoins are not used to make mainstream payments. But as cryptoasset markets develop, there could be potential for a stablecoin to launch and scale up rapidly, becoming a systemic payment system.”

On The Benefits of Cryptoassets and Decentralized Ledger Technology

The report proposed some benefits of cryptoassets and Decentralized Ledger Technology (DLT) or Blockchain Technology. The first of them is that it will make cross-border payments cheaper and more efficient by eliminating the need for centralized intermediaries.

The report stated that:

“Provided that they are safe and stable in value, cryptoassets and the technology underpinning them could reduce the cost, and increase the speed of cross-border payments by allowing transactions to take place directly between individuals (‘peerto-peer’) and reducing the need for centralised intermediaries.”

Beyond the efficiency this provides, the assessment shows that If undertaken within a well-designed and proportionate regulatory regime, Blockchain technology could increase competition in the UK financial system, further lowering costs to end-users. And it can also potentially be used to make financial market infrastructure (FMI) processes (in particular settlement) more efficient, transparent, and resilient.

Finally, the report states that “outside payments, decentralized networks used for lending could in time reduce the reliance on existing intermediaries if done safely.”

Assessing The Risks Posed by Cryptoassets And DeFi

Assessing the risks posed by cryptoassets and DeFi, the report considers their risks similar to other assets in the financial system.

“Many of the risks posed by cryptoassets and DeFi are similar to those managed by the existing regulatory framework in other parts of the financial system.”

the report stated.

Also considering the size of the crypto market, the report considers cryptoassets and DeFi less likely to impact the financial stability of the UK and the world.

To this effect, the report states that:

“Given cryptoassets currently represent only a small fraction of institutional investor portfolios, they are unlikely to present a risk to the UK and global financial stability in and of themselves.”

Response to The Report

The Prudential Regulation Authority (PRA) Deputy Governor and CEO Sam Woods wrote; “Dear CEO” letter to banks, insurance companies and designated investment firms on exposure to cryptoassets based on the assessment of this report.

The purpose of the letter was to “ensure that where firms do have exposures, they(the CEO’s) understand our (the PRA’s) expectations around risk management and measurement against the existing prudential framework.”

The bulk of the letter reminds the CEO’s of existing policies and regulatory frameworks in light of their increasing interest. The letter also asks for the completion of a survey on the organizations’ existing crypto exposure and plans for the year, due June 3.

Other News – Accountability For Cryptocurrency In El Salvador

The US senate which has since expressed concern over El Salvador’s adoption of Bitcoin as a legal tender, yesterday proposed legislation on the ‘accountability for cryptocurrency in El Salvador’. This move, according to the proponents of the legislation, is to mitigate risks the adoption of cryptocurrency by its Central American trading partners poses to the US economy.

Read more here…

Report on Cryptoassets News

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