On 24 March 2022, the Bank of England (in the name of its Financial Policy Committee) published a paper on the potential risks of cryptoassets to UK financial stability. While the risks are currently considered to be limited given the small size of the cryptoassets and associated markets relative to the global financial system, the FPC notes that the rapid growth of the crypto sector and potential for interconnections with the wider financial system mean that they will present financial stability risks in the future.

These risks include: risks to systemic financial institutions; risks to core financial markets; risks to the ability to make payments; and impact on real economy balance sheets. Given the potential for these risks to materialise, the FPC considers that:

• Those crypto technologies that perform an equivalent economic function to those in the traditional financial sector should be subject to existing regulation that need be adapted to ensure an equivalent regulatory outcome.

• In other cases, there is a need to work towards expanding or strengthening the current regulatory framework (e.g. tailor-made regimes) to mitigate the relevant risks. This will likely require the expansion of the role of and closer co-ordination between, the FCA, PRA, Bank of England and other UK regulators.

The FPC specifically notes that supervisory challenges posed by decentralised technology. For example, these technologies are often across multiple jurisdictions and there may not be a well-defined entity which could be subject to regulation.

The FPC specifically notes the potential risks that systemic stablecoins issued by non-banks may pose to financial stability. Bank of England and the FCA will carry out further work on the regulatory framework for stablecoins and the Bank intends to consult on its proposed regulatory model for system stablecoins and systemic wallets in 2023.