My take on the UK apex bank’s opinion on crypto assets and DeFi and its move to regulate the crypto industry.
Following the recent release of a 40-page report by the Financial Policy Committee (FPC) of the Bank of England, I decided to put my pen to paper in the form of a review – or should I say an analysis of the opinions and thoughts of the UK’s apex bank on crypto assets and DeFi.
Having said that, this is a review article, and I hope to make it as simple as possible for those who may find it cumbersome to go through the forty-page article. I will be reviewing the report based on the various headings raised in the report, and it will not be a comprehensive review per se – but I will review statements that stand out to me in the body of work.
So, just a heads up, this article is subjective and is colored by the lens of what I consider to be “standout-ish.” Without further ado, let’s dig in. I bet you will learn a thing or two by the time you get to the last sentence.
What is the role of crypto assets and DeFi in the financial system?
Now, for proper understanding of the review and the report if you decide to read it later, the report focuses on the UK’s financial system, which may be different from other systems.
Crypto assets – unbacked and volatile?
The FPC’s view of crypto assets is as unbacked, non-replicable strings of computer code that have no intrinsic value. According to their assessment,
“Currently, the vast majority of crypto asset activity is driven by the use of highly volatile, unbacked crypto assets as speculative investment assets.”
Being unbacked, which has led to high volatility, has been a major downside for cryptocurrencies, in my opinion. I mean, you can be a millionaire today and wake up to an empty wallet tomorrow. The number of crypto assets out there is growing by the day. Each day sees a new NFT (non-fungible token) project launched, a new ICO (initial coin offering), etc.
The “cryptosphere” is growing rapidly but the question remains – what is behind all these coins and crypto assets being floated on a daily basis? Do they have the necessary utility to stand the test of time? Well, this is why it is imperative to do your own research before investing.
These characteristics (that is, being unbacked and volatile), according to the FPC, make crypto assets unstable and vulnerable to major price corrections. The instability is actually like a double-edged sword, which means that the value of a crypto asset in the markets can rise by over 1,000 times in a short period and crash to zero within that same time.
Still, on the volatility of crypto assets, the FPC believes that Bitcoin returns are three times as volatile as the S&P 500. This is not an ‘off-the-top’ claim – they had facts and figures backing it.
So, what was their verdict on unbacked crypto assets? The report states,
“This price volatility makes unbacked crypto assets unsuitable to be widely used as money – for example, as a means of exchange or a store of value.”
With the number of fluctuations in the value of cryptocurrencies, it is a poor store of value – poor only when the market dips, anyway. In a bull market, who cares about crypto being a store of value?
Our darling stablecoins
If there are unbacked crypto assets, then there must be backed crypto assets. This is where the FPC took sides. Their report warmed up to stablecoins and went as far as seeing a future for it in the traditional financial system.
So, what future did the report see for stablecoins? The report said, “Given their perceived or purported relative stability in value, stablecoins may have greater potential to become widely used in payments, compared to unbacked crypto assets.” With this statement, they effectively took sides with backed crypto assets and predicted a promising future for stablecoins. They also added, “If appropriately designed, stablecoins could offer lower cost, real-time payments services, while also maintaining a reliable store of value.” Beyond payments, another future use case the FPC sees for stablecoins is as an alternative to commercial bank deposits. They see it as a possible means of storing household wealth. Financial stability implications of crypto assets and associated markets The report started the second section by extolling what it calls ‘crypto technology.’ It highlighted certain areas where this […]
source Bank of England’s Opinion on Cryptoassets and Decentralized Finance
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