“Hypermarkets” based on cryptocurrencies could pose a threat to wider financial stability, Bank of England Governor Mark Carney said on Tuesday.
In an interview with Germany’s Handelsblatt newspaper, the governor said “cryptocurrencies — and given their relative youth in financial markets, they have a long way to go” and that central banks could “mitigate the risks and increase the transparency of prices.”
While cryptocurrencies have been making gains recently with the introduction of a token-based digital currency called Bitcoin, there are still significant concerns about their stability and risk. The remarkable growth of Bitcoin in recent years has spurred a rise in consumer and investor interest, and has fueled tensions between regulators around the world.
The problems of bubbles and excessive risk taking are exacerbated by the decentralized nature of cryptocurrencies. The currencies are also extremely prone to manipulation, using mathematical formulas that render it more difficult to identify and deal with fraudsters.
Unusual activity in Bitcoin accounted for some of the 1.4 trillion dollars traded last year, according to analysts at Newedge, a trading platform.
And a study by JP Morgan and Morgan Stanley this year highlighted that the level of volatility in Bitcoin has increased markedly over the last four years, with a 2,300 percent increase in the value of Bitcoin since it was at its zenith in 2013. That compares with a rise of 70 percent in the S&P 500 during the same period.
Meanwhile, investors are going on a buying spree.
“We’re in early stages of this phenomenon, and we have seen a huge boom,” Randy Johnson, founder of Johnson Associates in Dallas, which buys Bitcoin and other cryptocurrencies, told the Washington Post last month. “Most people who are entering the market are older investors who are playing a game of luck, and the trend will be for market-crushing volatility.”
And yet there have been some positive signs that the financial system is ready to handle a rise in the use of cryptocurrencies. Since early last year, the Financial Stability Board, the international body that oversees financial stability, has been looking to establish a regime to identify any real risks posed by cryptocurrencies.
The FSB has already tested the idea of issuing virtual currencies on its own, and has said that it is examining “what additional measures and improvements should be made to enhance resilience of virtual currencies.”
In a draft consultation paper published late last year, the FSB said “a large number of global financial institutions have recognized the use of distributed ledgers, such as those of Ethereum and Bitcoin, could create an information asymmetry that increases risk to their organizations and the financial system.”
Global regulators are now now discussing whether and how to do something about it. So far, they have been focusing on what type of collateral to use for doing so.
As Alex Cavoulacos reported in early October, the U.S. Securities and Exchange Commission decided earlier this year to ban short selling of bitcoin and other crypto-assets because it could exacerbate their volatility.