Bank of England Warned Consumers About DeFi Risks Following FTX Collapse – Regulation Coming Soon?

Bank of England (BoE), the UK’s central bank, warned consumers about the risks of using decentralized finance (DeFi) protocols shortly after the crypto exchange FTX collapsed.

The warning from the central bank was given in a speech by Deputy Governor of the Bank of England, Jon Cunliffe, at an event hosted by Warwick Business School on Monday. In the speech, Cunliffe made a strong case for bringing crypto activities within the regulatory framework.

According to Cunliffe, there are three reasons why it is essential to regulate crypto-related activities now.

The first reason, according to the central banker, is to protect consumers and investors, and to make sure that crypto can be traded on “transparent, fair and robust marketplaces.” He made it clear that investors, if they choose to take part in the “highly speculative” crypto market, should be able to do so “with the protections that they would get in conventional finance.”

The second reason pointed to by Cunliffe was related to financial stability, and a need to protect the traditional financial system from risks arising from crypto.

“We should not wait until [crypto] is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact,” Cunliffe said, strongly hinting that regulators should act sooner rather than later.

Lastly, Deputy Governor Cunliffe pointed out that regulation could also be used to foster further innovation in the crypto space, and that these innovations could potentially also benefit traditional finance. As an example of this, he said smart contracts in DeFi have shown that they can combine the functions of trading, clearing and settlement into a “single, instantaneous contract,” rather than having it done by different institutions, as is the case in for instance the stock market today.

And while he admitted that the last proposal “may appear counter intuitive to those who see regulation as opposed to innovation,” the central bank official made it clear that he believes innovation can only develop and be adopted “at scale” within a solid regulatory framework.

This way, “we can ensure that the benefits of new technology and new business models actually flow from innovation rather than from regulatory arbitrage,” the BoE Deputy Governor said.

Advocating for CBDCs

Cunliff’s speech at the Warwick Business School was not the first time he commented on the crypto market and how the government should involve itself. Last year, Cunliffe also made the case for central bank digital currencies (CBDCs) in a report prepared for the G20.

“[…] CBDCs offer the opportunity to start with a ‘clean slate’,” Cunliffe said at the time, while adding that CBDCs opens up an opportunity to “avoid many of the challenges in today’s legacy technologies and processes” related to cross-border payments.