The crypto market is known for its volatility, but it is a fact that the kind of volatility it has been exhibiting of late is quite extreme, enough that it has financial authorities all over the globe quite concerned. One of these is the Bank of England (BoE), which recently said that the levels of volatility in the market highlight the need for enhanced and strong law enforcement and regulatory framework. The British central bank also said that there could be a further fall in crypto prices.
Crypto market vulnerabilities
On Tuesday, the Bank of England’s Financial Policy Committee said that the volatility that had been seen in crypto prices in the last couple of months has made the vulnerabilities of the crypto market quite evident. The British central bank stressed that the total market capitalization of the crypto space had fallen by $2 trillion, which indicates that there is a strong need for tough and effective regulation and law enforcement.
Last year in November, the total market cap of the crypto industry had hit a whopping $3 trillion, but it has now come down to $1 trillion in recent months, as prices of cryptocurrencies have plunged drastically. Bank of International Settlements’ general manager, Agustin Carstens, had said last month that all the weaknesses of the crypto space that had been talked about before had materialized. This includes participants seeing their leverage positions unwind and the mismatches in liquidity.
The British central bank stated that it was a must to come up with proper frameworks for law enforcement and regulation to address the condition of the crypto market.
The risks of volatility
The central bank asserted that the financial system in the UK was currently not threatened by the volatility in the crypto market in any way for now. However, it added that if crypto-related activities continue to integrate and interact with the traditional financial system, then they could see the emergence of systemic risks.
Christine Lagarde, the President of the European Central Bank (ECB) had also shared similar sentiments in the previous month. She had said that cryptocurrencies, along with the decentralized finance (DeFi) space could put financial stability at risk.
Risk to financial stability
The same sentiments have also been echoed by others, including the deputy governor of financial stability for the Bank of England, Sir Jon Cunliffe. He has stated on different occasions that unless the crypto market is regulated, it could be a threat. Back in May, he had warned crypto investors that they would face difficult times ahead as the US Federal Reserve and other central banks were tightening their monetary policy.
Last year in December, he had said that crypto prices could come down to zero. The Bank of England’s governor, Andrew Bailey said last month that investors should be ready to lose their money when they decide to make crypto investments. He added that bitcoin was not a suitable means of payment and no intrinsic value could be associated with cryptocurrencies.