Unbacked cryptocurrencies prone to collapse, but emerging tech has growth potential: British regulator

SINGAPORE - Cryptocurrencies that lack real economy assets to back them and have no means of generating revenue are worth only what the next buyer will pay for them.

This makes them "inherently volatile, very vulnerable to sentiment and prone to collapse", Bank of England deputy governor Jon Cunliffe said on Tuesday (July 12).

Despite its promises to revolutionise finance, "technology does not make assets with no intrinsic value a safe or a one-way bet", he added.

Yet, Mr Cunliffe acknowledged that some emerging technologies have the potential to grow both in the crypto space as well as in the traditional financial system, making it key to bring the use of crypto technologies in finance within the regulatory perimeter.

One example is the use of crypto technology and smart contracts in the exchange, clearing and settlement of stocks and bonds, which today are carried out in sequence by separate entities at significant cost, he said.

If successfully developed, the new technologies could lead to lower costs, greater speed and more transparency for investors, he added.

Mr Cunliffe was addressing the media at the British High Commission in Singapore. He discussed the lessons learnt from the recent crypto crash, which has seen the value of Bitcoin lose 70 per cent of its value and led to a spate of bankruptcies in the sector.

One of the biggest bankruptcies is crypto lender Three Arrows Capital, which was licensed by the Monetary Authority of Singapore (MAS) to manage up to $250 million in assets.

By the time MAS reprimanded Three Arrows on June 30 for providing false information and exceeding the threshold of assets that it was licensed to manage, the firm was already collapsing.

Mr Cunliffe compared the recent crypto crash to the dot.com boom and bust in the early 2000s, saying that many early Internet companies had also run businesses that were highly speculative, leading to their collapse, such as online pet supplies retailer Pets.com, which folded after two years.

"However, the technology did not go away but rather re-emerged in a different form, focused on the development of platforms which have now come to dominate Internet commerce," said Mr Cunliffe, who made a pit stop in Singapore on his way to Bali for the Group of 20 meetings.

The regulator's role, against that backdrop, is therefore to ensure innovations in crypto can continue, but without introducing risks to the global financial system.

Mr Cunliffe warned that such risks could escalate quickly, given the growing connections between crypto and conventional finance.

But drawing up a well-balanced set of regulations that encourages growth while protecting retail consumers is no straightforward task, as existing regulations may not be sufficient to effectively manage the emerging risks, he said.

Holders of stablecoins used for international settlement purposes, for example, should have a clear legal claim that enables them to redeem the coin within the day and at par in central or commercial bank money, he added.

This is similar to how commercial banks that issue deposit based money have to be able to repay depositors at par, in fiat, and on demand.

Mr Cunliffe added that the bodies responsible for setting international standards for crypto, such as the Basel Committee on Banking Supervision, are in the process of issuing guidance on the prudential treatment of crypto assets held by banks.

Standards to protect investors and promote market integrity across crypto assets, exchanges and platforms for lending and trading are also being discussed.

For now, though, crypto firms lack governance arrangements which allow for timely human intervention and expert judgments in dealing with unforeseen circumstances, said Mr Cunliffe.

As a result, many crypto-related activities are simply prohibited.

Mr Cunliffe's views are similar to those of the MAS, which is exploring the use of digital currencies to facilitate cross-border payments, among other blockchain technologies.

It has so far granted licences and in-principal approvals to 14 digital payment token service providers.

At the same time, MAS is considering having additional consumer protection rules, including limiting retail participation and imposing rules on the use of borrowed capital when transacting in cryptocurrencies, Senior Minister and Coordinating Minister for Social Policies Tharman Shanmugaratnam said on July 4.

In May, Deputy Prime Minister Heng Swee Keat warned retail investors to "steer clear" of cryptocurrencies following the demise of Stablecoin TerraUSD and its sister token Luna.