FTX: Tougher crypto rules needed after collapse, says Bank of England

Better regulations are needed to protect the financial system after the collapse of the FTX cryptocurrency exchange, a senior Bank of England official has said.Digital currencies are still too small to pose a threat but that will soon change, said Sir Jon Cunliffe.

FTX filed for bankruptcy last week and owes its largest creditors almost $3.1bn(£2.6bn).Thousands of its users are also waiting to get their money back.

Sir Jon, who is deputy governor for financial stability at the Bank, also said the recent volatility in the value of cryptocurrencies posed a threat.The value of Bitcoin, the world’s largest digital currency, has dived by almost 70% in the last year.He said the crypto world was, at present, not “large enough or interconnected enough with mainstream finance to threaten the stability of the financial system”.But he said its links with mainstream finance were developing rapidly.

“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 experience in other areas of digitalisation has demonstrated the difficulty of retrofitting regulation on new technologies and new business models after they have reached systemic scale,” he told an audience at a Warwick Business School event.

It comes as the UK is set to approve laws in the Financial Services and Markets Bill, which is currently in Parliament. The bill will introduce regulation for stable coins – a crypto asset backed by an asset such as a currency – and the marketing of crypto assets.Before FTX collapsed, its then-CEO Sam Bankman-Fried took every chance he could to describe his firm as “the most regulated” in the industry.

It’s true that FTX had collected dozens of permissions to operate in many countries and to offer many different crypto services.But clearly, in the end, those certificates were useless at protecting customers and investors.Every time there is a major crisis in crypto the cries for regulation grow, but it’s the type of regulation that matters.The chief concerns for authorities seem to be about protecting customers from crypto firms going bust and ensuring that they don’t run off with people’s money.But as ever with cryptocurrency there is a tension between safety and freedom.

Regulating crypto firms to ensure they are safe and responsible entities would bring them a step closer to the traditional financial system – a huge no-no for crypto believers.But whatever the true believers want, the FTX chaos may well be the point of no return.In his speech, Sir Jon noted that the UK’s financial regulator, the Financial Conduct Authority, had been warning for several weeks before FTX’s collapse that “this firm may be providing financial services or products in the UK without our authorisation… you are unlikely to get your money back if things go wrong”.FTX did not have a licence to operate in the UK, but its implosion has caused shockwaves around the world.The company’s filings have revealed that more than one million people and businesses could be owed money following its collapse.On Saturday, FTX said it had launched a review of its global assets and was preparing for the sale or reorganisation of some businesses.

‘Complete failure’

Last week, new FTX chief executive John Ray hit out at the way the failed crypto exchange was run, saying he had never “seen such a complete failure of corporate controls”.Mr Ray, who replaced the company’s founder Sam Bankman-Fried, criticised what he called a “complete absence of trustworthy financial information”.Mr Bankman-Fried was one of the crypto world’s most high-profile personalities, with the 30-year-old becoming a billionaire in 2021.His FTX crypto exchange grew to be the second largest in the world, with $10bn-$15bn traded a day.It spent millions on advertising, including during the Superbowl, and last year it acquired the naming rights for the Miami Heat NBA team’s arena.Mr Bankman-Fried also projected an unconventional approach to business, tweeting pictures of himself sleeping on a beanbag next to his desk in the office.

Digital pound

Despite the ructions in the crypto world caused by FTX’s collapse, Sir Jon said the need for a UK digital currency was still being considered by the Bank of England.He said the work on a digital pound was driven by “the reducing role of cash, and more generally in the increasing digitalisation of daily life”.Sir Jon said the Bank planned to issue a consultative report around the end of the year setting out the possible next steps.