BOE Says Crypto Needs Tougher Rules After $2 Trillion Drop

William Shaw and David Goodman, Bloomberg News

A neon sign indicates that Bitcoin is available inside an Alza.cz store in Prague, Czech Republic, on Tuesday, May 17, 2022. Crypto companies have started to plan for a potential protracted market slowdown. , Bloomberg

(Bloomberg) -- The Bank of England said a $2 trillion plunge in the value of cryptoassets underscores vulnerabilities in the market and the need for tougher law enforcement and regulation.

The market capitalization of digital assets has tumbled to about $900 billion from a peak of almost $3 trillion in late 2021, the BOE’s Financial Policy Committee said Tuesday.

The “extreme volatility” in recent months revealed weakness in the market including liquidity mismatches that led to fire sales, and participants unwinding leveraged positions. Those features of the market have the potential to amplify further declines in prices, the central bank said.

Regulators in the UK and Europe have been hardening their rhetoric against the industry, saying they’re concerned that contagion from the crypto market could damage the broader financial system.

The BOE in December repeated its warning that the rapid growth of cryptocurrency assets could pose a risk to the stability of the UK financial system. In October, BOE Deputy Governor Jon Cunliffe said the cryptocurrency market could pose a threat unless urgently regulated.

The BOE said the recent volatility in crypto markets so far isn’t posing a risk to the overall system. But without action, systemic risks would emerge if cryptoassets activity and its connection to banks and other markets continues to grow.

“This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets,” the BOE said.