Bank of England Warns of Risks of Crypto Assets

The Bank of England (BoE), the UK’s central bank, has issued a warning to commercial banks and insurers about the potential of crypto assets being used for fraudulent activity and that by encouraging activity around cryptocurrency could harm their reputations.

Sam Woods, the bank’s deputy governor for Prudential Regulation addressed a letter last Thursday to CEOs of banks and insurers under his supervision. Woods is also head of the Prudential Regulation Authority, which is responsible for monitoring the UK’s banking and insurance markets.

Woods is concerned about the fast and unregulated growth of the cryptocurrency space and its vulnerability to cyber attack. He wrote, “In their short history, crypto-assets have exhibited high price volatility and relative illiquidity. Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks.”

The Bank of England has asked companies to inform it about any exposure, use, or operations related to digital currencies; it has also encouraged companies to carefully assess the risks before engaging in such activities.

“Firms should conduct extensive due diligence before taking on any crypto-exposure and maintain appropriate safeguards against all the related risks,” Woods said.

His letter states that bonuses and remuneration practices should not be used by banks or insurers with the intent of encouraging employee interest in crypto assets. He warned that companies that deliberately increase their exposure to crypto-assets – and therefore the associated risks – stand the chance of destroying their reputation.

The letter states: “Entering into activity related to crypto-assets may give also rise to reputational risks. These risks are relevant to both the Financial Conduct Authority’s (FCA) and the PRA’s statutory objectives.”

The UK Financial Conduct Authority sent a similar letter recently, addressed to banks and financial providers, about the risks associated with cryptocurrencies.

However, the BoE’s Financial Policy Committee, the central bank’s body that analyses risk within the financial markets, concluded in March that cryptocurrencies do not present any danger to the UK’s financial stability.

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