The Bank of England has warned that the prices of risk-on assets, including those of cryptocurrencies, remain vulnerable to further sharp adjustments amid looming downside risks of recession, additional supply shocks, and faster-than-expected monetary policy tightening.
Key Takeaways
- The Bank of England has warned that risk-on assets, including equities and cryptocurrencies, remain at risk of further sharp price adjustments.
- In a new report, the bank said that the crypto market's crash had highlighted several vulnerabilities that underscore the need for stricter regulation and enforcement.
- The BOE added that cryptocurrencies do not yet pose risks to the stability of the broader financial system.
The Bank of England has also underscored the need for enhanced regulatory and law enforcement frameworks.
BOE Warns Crypto Could Slide Further
The Bank of England has warned that the pain for both traditional and crypto markets may not be over.
In a report published Tuesday, the central bank’s Financial Policy Committee said that the worsening economic outlook had caused extreme volatility in the markets in recent months, leading to sharp declines in the prices of risk-on assets like equities and cryptocurrencies. According to the report, the crypto downturn has exposed several vulnerabilities in the market that do not pose risks to overall financial stability but highlight the need for stricter regulations and enforcement. An excerpt read:
“A number of vulnerabilities were exposed within cryptoasset markets similar to those exposed by past episodes of instability in more traditional parts of the financial system. These include liquidity mismatches leading to run dynamics and fire sales, and leveraged positions being unwound and amplifying price falls. Investor confidence in the ability of certain so-called “stablecoins” to maintain their pegs was weakened significantly, particularly those with no or riskier backing assets and lower transparency. These events did not pose risks to financial stability overall.”
The BOE further explained that if crypto’s popularity and correlation with the traditional financial system continued to grow, systemic risks for the broader economy could emerge. According to the central bank, this underscores the need for “enhanced regulatory and law enforcement frameworks” addressing the developments in these markets and activities.
While the BOE called for stricter crypto regulation, it didn’t suggest new rules for traditional assets like stocks. Notably, the stock market has lost over $11 trillion since the beginning of the year, around 3.6 times the total value of the cryptocurrency market at its peak.
The stocks of many so-called blue-chip technology companies, including Meta Platforms Inc (NASDAQ:META), Netflix (NASDAQ:NFLX), PayPal (NASDAQ:PYPL), and Shopify (NYSE:SHOP), have registered brutal declines of 52.7%, 69.8%, 63.3%, and 77% on a year-to-date basis without attracting any regulatory attention. Bitcoin is down about 55% over the same period.
Despite the already significant market correction, the BOE reiterated that the pain for equities and cryptocurrencies might not be over.
“Given downside risks from additional supply shocks, faster-than-expected monetary policy tightening and slower-than-expected economic growth, risky asset prices remain vulnerable to further sharp adjustments,” it said.