Sun. Aug 7th, 2022

Sir Jon Cunliffe, Bank of England Deputy Governor, has warned that the supply of credit through the banking system could be killed in the cryptocurrency economy.

Crypto Economy Could End Bank Lending System

Cryptocurrencies have been gaining traction in the financial industry, and banks across the world are taking notice of these digital assets. However, several benefits and disadvantages of cryptocurrencies have been discussed at length by various economists and industry experts over the past few years.

The latest figure to comment on the emergence of cryptocurrencies is Sir Jon Cunliffe, a deputy governor at the BoE (Bank of England). According to Sir Cunliffe, the cryptocurrency economy could end the supply of credit through the banking system. If that happens, then it would have profound economic consequences, as he discussed the potential risks of Facebook’s Libra project and global stablecoins.

Sir Cunliffe, while giving a speech at the London School of Economics, stated that there is a new wave of technological development that allows transactional use outside of commercial and central banks, and they are known as cryptocurrencies.

He added that with these new digital currencies, since stablecoins are linked to large social media platforms and technology, they are likely to become mainstream for people. As a result, people are likely to move from holding all or much of the fiat money they are holding in bank accounts, to rather holding cryptos in virtual ‘wallets’ which are not provided by banks.

In a world of crypto currencies, the Bank of England’s deputy governor for financial stability believes that lending to the real economy via the banking system could become weaker, or it might even disappear.

Facebook’s Libra and Other Stablecoins Pose Risk

This isn’t the first time that the Bank of England has warned about the risks posed by Facebook’s Libra coin and other cryptos. UK’s apex bank believes that these currencies have to be studied carefully before they are allowed to launch.

Sir Cunliffe holds the same opinion and mentioned that authorities have to ensure that the stablecoins to be used as money have to meet the standards applied to commercial bank money. They also have to pass other tests in areas like data protection, competition, and anti-money laundering.

Libra, and other cryptocurrencies, have been discussed at virtually every G20 meeting over the past few years. Last week, a statement issued by the G20 finance ministers and central bank governors maintained their positions that stablecoins are risky. The financial experts stated that the global cryptocurrencies and other similar arrangements pose risks that have to be evaluated and adequately addressed before they are allowed to launch. The body also intends to support the FSB’s (Financial Stability Board) efforts to develop regulatory recommendations concerning these arrangements.

In a research paper published by the Bank of International Settlement (BIS), following research by the G7 Working Group, the experts maintained that global cryptocurrencies could heighten the vulnerabilities within the more extensive financial system via various channels.

The paper warned that the retail deposit of money at banks would drastically reduce if people hold the stablecoins permanently in cryptocurrency wallets. This would ultimately force banks to increase their dependence on more volatile and costly sources of funding. If the intermediaries in the stablecoin economy gain more financial intermediation activity, the profitability of banks could further reduce, which would see the banks take more risks or resort to lending to the real economy.

By barry