Bank of England Warns Finance Firms Over Crypto Risks

The Bank of England's deputy governor for prudential regulation has warned banks about exposure to cryptocurrency-related assets in a new letter.

Sam Woods, chief executive of the Prudential Regulation Authority - a financial services regulator in the U.K. - wrote Thursday that banks, insurance companies and investment firms should take steps to protect themselves against market volatility and potentially risky investments in the crypto space.

The deputy governor's warning focused strictly on the tokens themselves, reminding financial institutions that they have a fiduciary responsibility under PRA regulations.

"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."

The letter further stated that financial institutions should take steps to minimize any possible risk caused by trading in crypto assets, including having a PRA-approved Senior Management Function auditor review and authorize risk assessment frameworks for dealing with the new class.

Firms must also avoid excessive risk-taking, ensure access to experts in crypto assets and conduct due diligence on any assets they may want to trade in.

"Classification of crypto-asset exposures for prudential purposes should reflect firms' comprehensive assessment of the risks involved," Woods wrote, adding that these classifications should cite potential risks when investing in cryptocurrencies.

The deputy governor also pushed back against the idea that cryptocurrencies are a form of money, saying "Crypto-assets should not be considered as a currency for prudential purposes."

In the letter, Woods also took the time to acknowledge that distributed ledgers and blockchain technology exist separately from cryptocurrencies, writing, "We also recognise that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time."

CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.