Monday, November 21, 2022

FTX implosion shows urgent need for crypto rules, says Bank of England

The crypto sector requires regulation before it threatens the stability of the wider financial system

The implosion of FTX has underlined the need to rapidly bring crypto within the remit of financial watchdogs before it threatens the stability of the wider financial system, the deputy governor of the Bank of England has warned today.

The collapse of FTX, founded by disgraced former billionaire Sam Bankman-Fried, has sent shockwaves through the crypto world and revealed major corporate failings at the top of the firm.

Speaking today at a policy event, the deputy governor of the Bank Jon Cunliffe said there was now a pressing need to tighten oversight of firms before they grew large enough to threaten the stability of the wider global economy.

“While the crypto world, as was demonstrated during last year’s crypto winter and last week’s FTX implosion is not at present large enough or interconnected enough with mainstream finance to threaten the stability of the financial system, its links with mainstream finance have been developing rapidly,” Cunliffe said.

“We should not wait until it is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact.”

The failed crypto bourse is now being wound-up under the leadership of insolvency veteran John Ray III, who last week described the corporate failings at FTX as worse than Enron.

Britain’s financial regulators have been edging into the space but currently only have oversight of crypto firms on anti-money laundering grounds.

Lawmakers have been pushing for more of the space to be brought under the remit of the Financial Conduct Authority and Prudential Regulation Authority, however. City minister Andrew Griffith tabled an amendment to the Financial Services and Markets Bill that will allow regulators to roll out a full framework for crypto currencies.

Cunliffe said the Treasury intends to consult in the near future on “extending the investor protection, market integrity and other regulatory frameworks” that cover the the crypto sector.

“Our aim is to ensure that innovation can take place but within a framework in which risks are properly managed and which safeguards the sustainability of such innovation,” he added.

“The events of last week provide a compelling demonstration of why that matters.”

Bankman-Fried has already fallen into the sights of a host of global regulators including the SEC in the US, and investigations into the lack of corporate controls and misuse of client funds are expected to follow.

The firm’s new chief John Ray III, who was parachuted into the firm to oversee its winding up, said last week that the failures of the firm were the worst he had seen.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” he wrote in a filing with the Delaware bankruptcy court last week.

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