Senior Bank of England official Jon Cunliffe said on Wednesday that the bank has "growing concerns" about investor protection, law enforcement and market integrity in relation to the burgeoning use of crypto assets in the UK.
"Risks in these areas are not the direct responsibility of financial stability authorities and do not normally pose risks to the financial system as a whole. But they can be a trigger for destabilising market corrections," Cunliffe said in a speech at SIBOS on Wednesday.
The bank's deputy governor for financial systems said widespread market corrections could lead to a damaging loss of confidence in the financial system as a whole.
As such he concluded that regulation of digital assets needs to be "pursued as a matter of urgency".
Cryptoassets have grown by roughly 200% in 2021, from just under $800bn to $2.3tn today. They were worth just $16bn five years ago. The global financial system is worth $250tn.
"As the financial crisis showed us, you don’t have to account for a large proportion of the financial sector to trigger financial stability problems — sub-prime was valued at around $1.2tn in 2008," said Cunliffe.
Cunliffe also said the crypto world is "beginning to connect to the traditional financial system" with the emergence of leveraged players. "Crucially, this is happening in largely unregulated space," he said
Singling out bitcoin (BTC-USD), the largest cryptocurrency, he noted that its volatility has been more than 12 times that of the US's S&P 500 (^GSPC). He also said that as an asset, it is generally unsuitable for making payments due to the volatility, "except for criminal purposes".
The comments come following an earlier panel at SIBOS with the BoE's head of fintech, Tom Mutton, who warned that fragmentation and interruptibility in the implementation of a digital pound, or Central Bank Digital Currency (CBDC), could lead to "bad outcomes and weak and fragile systems".
"People's payments needs may evolve quickly and in ways we can't anticipate," said Mutton, comparing the leap to how smartphones have changed the payments landscape. "We should be open minded on innovation," he said.
Watch: What are the risks of investing in cryptocurrency?