According to the Bank of England, a $2 trillion decline in the value of crypto assets highlights market vulnerabilities and the need for more stringent enforcement and regulation. As per the Financial Policy Committee of the BOE, the market value of digital assets has decreased to roughly $900 billion from a peak of about $3 trillion in late 2021.
Recent instances of “extreme volatility” exposed market weaknesses, such as liquidity mismatches that triggered fire sales and participants unwinding leveraged positions. According to the central bank, those market characteristics could aggravate additional price decreases.
Regulators in the UK and Europe have stepped up their criticism of the sector, claiming they are worried that a ripple effect from the cryptocurrency market might harm the larger financial system.
The BOE reiterated in December that the UK financial system’s stability may be at risk due to the rapid expansion of Bitcoin assets. The market for cryptocurrencies, according to BOE Deputy Governor Jon Cunliffe, might be dangerous if it is not immediately regulated.
According to the BOE, the recent volatility in the cryptocurrency markets isn’t now endangering the system as a whole. BOE said,
“This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets,”
But if nothing is done, systemic concerns could develop as the use of crypto-assets and their connections to banks and other markets increase.
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