What has happened?

The Governor of the Bank of England has said that cryptocurrencies will face a regulatory clampdown, even though their underlying technology is "exciting".

What does this mean?

During a speech at the Scottish Economics Conference in Edinburgh last week, Mark Carney launched an attack on cryptocurrencies, saying that they are "failing", exhibiting "the classic hallmarks of bubbles" and are ultimately "unlikely to be the future of money".

Even though Carney believes that the prospects of cryptocurrencies replacing fiat money are "tenuous at best", he called for more rigorous regulation to be applied to exchanges, arguing that overseeing elements of the cryptocurrency ecosystem, rather than banning them, was a better path to protect consumers and clamp down on illicit activities.

"The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities," he said.

He added: "In my view, holding crypto-asset exchanges to the same rigorous standards as those that trade securities would address a major underlap in the regulatory approach."

However, the governor did not think that cryptocurrencies pose an immediate risk to financial stability.

This is partly because they are small relative to the financial system, with a combined global market capitalisation that was, even during their recent peak, "less than 1% of global GDP".

Financial stability risks could arise, however, as retail adoption increases or if the formal financial sector fails to improve its systems.

While asserting that cryptocurrencies raise of host of issues, such as consumer protection, financial stability, money laundering, tax evasion and so on, Carney said it was important not to dismiss them and that regulation would benefit the industry and consumers alike.

"[Cryptocurrencies'] core technology is already having an impact. Bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better," he said.

Cryptocurrencies also exemplify a broader societal and economic reorganisation, whereby people are increasingly forming connections directly and instantaneously, as they are an attempt to create the financial architecture for peer-to-peer transactions.

According to Carney, they are therefore "throwing down the gauntlet to the existing payment systems", forcing these to evolve to meet the demands of reliable, real-time, distributed transactions.

Carney's comments come after a plethora of national and international regulators have warned investors about the risks associated with cryptocurrencies.

For example, in January, the Financial Conduct Authority warned of the rise of online investment fraud, including cryptocurrencies and the International Organisation of Securities Commissions also cautioned investors against initial coin offerings.

Last month, the UK Treasury select committee, also launched an inquiry into cryptocurrencies.

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