What has happened?
The deputy governor for prudential regulation of the Bank of England has warned financial institutions about their exposure to crypo-assets.
What does this mean?
In a letter published at the end of June, Sam Woods, chief executive of the Prudential Regulation Authority (PRA), said that banks, insurers and investment firms should take steps to protect themselves against some of the risk associated with crypto-assets.
Woods also reminded firms that they have a responsibility to have effective risk strategies and risk management systems in place under the PRA’s Fundamental Rules.
They also need to deal with regulators "in an open and co-operative way" and make the appropriate disclosures.
"In their short history, crypto-assets have exhibited high price volatility and relative illiquidity. Crypto-assets also raise concerns related to misconduct and market integrity – many appear vulnerable to fraud and manipulation, as well as money-laundering and terrorist financing risks. Entering into activity related to crypto-assets may give also rise to reputational risks", Woods wrote.
Some of the steps financial institutions should take to minimise any risk caused by any exposure to crypto-assets include having a PRA-approved individual perform a Senior (Insurance) Management Function in reviewing and signing off on the risk assessment framework for any exposure to crypto-assets.
Firms should also ensure that they do not encourage excessive risk-taking, conduct due diligence and have access to relevant expertise to assess any risks stemming from their exposure to crypto-assets.
Woods also reminded firms that cryptocurrencies should not be viewed as currencies.
"Classification of crypto-asset exposures for prudential purposes should reflect firms’ comprehensive assessment of the risks involved. Although classification will depend on the precise features of the asset, crypto-assets should not be considered as currency for prudential purposes," Woods wrote.
However, Woods also acknowledged that blockchain and distributed ledger technology "have significant potential to benefit the efficiency and resilience of the financial system over time".
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