Bank of England issues a letter warning finance firms over crypto risks

Amidst the growing popularity and concerns about cryptocurrencies, Bank of England deputy governor has issued a letter to the CEOs of financial institutions, warning them of the need for regulation when it comes to being exposed to crypto assets.

The letter written by Sam Woods, chief executive of the Prudential Regulation Authority (PRA) – a financial services regulator in the UK says- “Banks, insurance companies, and investment firms should take steps to protect themselves against market volatility and potentially risky investments in the crypto space”.

The letter reminded financial institutions of their obligations to PRA rules. It demanded cooperation with regulators including acting in a prudent manner, having effective risk management systems and strategies.

As per the list of guidelines provided in the letter “steps should be taken by financial institutions to minimise any possible risk caused by trading in crypto assets”. The other guidelines state that the crypto assets should have a PRA-approved Senior (Insurance) Management Function auditor review.

It also highlighted that institutions should also authorise risk assessment frameworks for dealing with the new class. Firms must avoid taking excessive risks. They should conduct extensive due diligence prior to taking on any crypto-exposure. The institutions must maintain appropriate safeguards against all the related risks.

According to Woods, crypto-asset market products in their short history have grown quickly. The products have exhibited high price volatility and relative illiquidity. This in turn generated below mentioned concerns to the firms involved with them:

    • Vulnerability to fraud

    • Use in money laundering

    • Manipulation

    • Reputational risks

    • Terrorism financing

With the intention to improve the efficiency of the traditional financial system in the future, “significant potential” of distributed ledger technologies, like blockchain has also been noted by Woods.