Crypto Watch 016 👀

A cheeky look at the thinking of the Bank of England

Sir Jon Cunliffe, Deputy Governor of the Bank of England has made a speech about Cryptocurrencies. He kindly summarises his position early on:

Crypto technologies offer a prospect of radical improvements in financial services. However, while the financial stability risks are still limited, their current applications are now a financial stability concern for a number of reasons.

Read the whole thing here:

Sir Jon discusses 3 different classifications within the Crypto Space:

  • Unbacked Crypto assets (Bitcoin, Ethereum and anything else thats volatile)

  • Stablecoins (Tether, DAI etc) - Any coin that is linked to a fiat currency

  • Decentralised Finance (De-Fi) - Software that can provide banking services automatically without the need for a bank

If your interested in Crypto you need to know what places like the Bank of England (BoE) and the Financial Conduct Authority (FCA) are thinking. These places are the referees of the existing financial sector and Crypto technology is working towards making them redundant. No one likes having power stripped from them so expect a push back.

Lets look at some quotes.

Unpacked Crypto assets

A necessary thought experiment from a financial stability perspective is what would happen in the financial system if there was a massive collapse in the price of unbacked crypto assets - at the extreme end, if the price fell to zero.

That’s all well and good but the kicker comes next:

Such a collapse is certainly a plausible scenario, given the lack of intrinsic value and consequent price volatility, the probability of contagion between Crypto assets, the cyber and operational vulnerabilities, and of course, the power of herd behaviour.

‘Lack of intrinsic value’ in this case means crypto is not backed by assets or commodities (like fiat currencies then lol!). The problem the BoE is worried about is the contagion risk of losses in the crypto space triggering sell off’s and panic everywhere else. The great financial crash of 2008 was triggered by a relatively small market (sub prime mortgages) which snowballed because the banks were in a load of trouble and over exposed. The crypto industry is larger today than the subprime mortgage market was in 2008.

A severe fall in the value of cryptoassets could trigger margin calls on crypto positions forcing leveraged investors to find cash to meet them, leading to the sale of other assets and generating spillovers to other markets.

Sir Jon concludes his position on ‘unbacked’ crypto’s as follows:

My conclusion is that while a severe price correction would not cause financial stability problems now, all else equal, the current trajectory implies that this may not be the case for very long.

At The Wealth Gap we think Sir Jon is lining up the crypto industry to take the blame for the next financial crash. Never mind the money printing, Covid or the massive pyramid scheme known as China, Crypto will be blamed for all the worlds ills. This is convenient for the incumbent system because they can stall the rollout of Crypto that bit longer if everyone believes Crypto is evil. Kicking the can down the road gives them time fight back.

Stable Coins

Stablecoins are backed by other assets and those assets limit the volatility of those coins when compared with fiat (USD, GBP etc).

Sir Jon does not like Stable Coins….

Unlike existing payments systems which operate in central bank or commercial bank money, stablecoin payment systems issue their own money, the ‘coin’. This raises fundamental issues around the safety and interoperability of private money used in our economies. Stablecoin arrangements can be decentralised on public networks, with no overarching entity responsible for their operation. They can also be structured in novel ways as sets of separately operated yet interdependent functions that can frustrate comprehensive, end to end, risk management.

Stable Coins can’t be controlled and pose a massive regulatory challenge. The BoE will not like any currency that it cannot control. We must remember that the BoE has been tasked with providing financial stability. Currencies operating outside of its control will significantly reduce the BoE’s ability to deliver on its targets.

Decentralised Finance

Decentralised Finance (De-Fi) describes software packages that use blockchain and smart contract technology to provide financial services. Loans are common at the present but savings vehicles, trading platforms and derivatives markets are being developed. These are all services historically provided by banks which will now be run autonomously using code….

Regulatory authorities will need to ensure that the standards that apply to current systemic payment systems apply equally effectively to any systemic or likely to be systemic payment system using stablecoins.

However, applying this principle of ‘same risk, same regulation’ to systemic payment systems based on stablecoins and crypto technology poses a number of a challenges.

We anticipate that the De-Fi space will be messy over the short term but as it finds its legs and becomes more accessible to customers it should grow to replace the banks in these markets.

Sexy Numbers For Reference :

  • There are 150-200 specialist Crypto Hedge Funds

  • Approximately 2.3 million UK adults own Crypto

  • 21% of traditional hedge funds already hold exposure to crypto with an average allocation of 3%

A Warning

It is not the responsibility of financial stability authorities to preserve any particular business models, including in banking. The banking system has, throughout its history adapted to technological innovation and competition from new players and it will need to continue to do so. (Indeed, banks have benefited in recent decades from the technological innovations that have driven transactions away from cash to electronic transfer of bank deposits). However, financial stability authorities do have a legitimate interest in ensuring any transition is smooth and does not generate instability.

Reading the above you would never think that the BoE bailed out the financial system in 2008. This crisis was the motivation for the development of Bitcoin. So relevant was the issue that Satoshi had the first genesis block contain the following image 👇🏼

Go figure 🤪

The banks created the 2007 financial crisis and in their arrogance they are now trying to say that the crypto industry could cause another crash!

We at The Wealth Gap think they can get fucked.

Keep stacking sats and HODL.

Till Next Time

The Wealth Gap Team