Deputy governor Sam Woods recommended three steps that banks and investment firms should follow to avoid cryptocurrency exposure risk.
The Bank of England (BoE) has alerted financial institutions over risks related to cryptocurrency investments in an open letter published on June 28. Deputy governor Sam Woods pointed out that digital coins are unstable and can be used for criminal activities and outlined three steps that banks, insurance companies and investment firms should undertake as precautionary measures.
Woods noted that at the moment virtual currency risks are limited but financial institutions should remain cautious for their existing and future crypto exposures.
“The range of products and market participants related to crypto-assets has grown quickly. In their short history, crypto-assets have exhibited high price volatility and relative illiquidity,” Woods wrote.
“Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks. Entering into activity related to crypto-assets may give also rise to reputational risks.”
While acknowledging blockchain technology potential, the deputy used the term crypto-assets for digital coins similar to G20 terminology because “crypto-assets should not be considered as currency for prudential purposes.”
Woods, who is also head of BoE’s Prudential Regulation Authority (PRA), reminded financial institutions that they have fiduciary responsibilities under PRA rules such as building efficient risk and management systems. Banks, insurance companies and investment firms can meet these obligations by following three steps:
1.The PRA-approved Senior (Insurance) Management Function auditor should be involved in cryptocurrency risk assessment;
2.Crypto-assets activities should not encourage “excessive risk-taking”;
3.Updating risk management policies and expertise for the rapidly changing cryptocurrency industry, including due diligence procedures.
“Firms should conduct extensive due diligence before taking on any crypto-exposure and maintain appropriate safeguards against all the related risks,” Woods said.
Bank of England expects financial institutions to inform their PRA supervisory contact for any cryptocurrency exposure or activity on an ad hoc basis, together with the relevant risk assessment.
Earlier this week, the international standard-setting organization Financial Stability Board, whose head is the current BoE governor Mark Carney, announced that it has developed crypto risk monitoring framework that will be presented in the upcoming July summit of G20 financial ministers and central bank governors.
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