BoE’s Prudential Regulation Authority warns members on crypto assets

The Prudential Regulation Authority, the arm of the Bank of England that regulates and supervises around 1,500 banks, building societies, credit unions, insurers and major investment firms, has issued a letter to CEOs of the firms under its oversight to warn them about obligations regarding cryptocurrency assets. 

The letter, from the desk of the Authority’s deputy governor Sam Woods, warned its recipients that “In their short history, crypto-assets have exhibited high price volatility and relative illiquidity.”

They have, he goes on to say, raised “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.”

It goes on reiterate members’ obligation to “(i) act in a prudent manner; (ii) have effective risk strategies and risk management systems; and (iii) deal with regulators in an open and co-operative way, and disclose appropriately anything relating to your firm of which we would reasonably expect notice.”

It then offers suggestions regarding “risk strategies and risk management systems” that include all potential investments in the sector being “considered fully by the board and highest levels of executive management”, that “remuneration policies and practices should ensure that the incentives provided for engaging in this activity do not encourage excessive risk-taking,” and that firms ensure “their risk management approach is commensurate to the risks of cryptoassets.”

It concludes that, “Given the technical complexity of crypto-assets, firms should ensure that they have access to appropriate, relevant expertise to assess any risks stemming from their exposure to these assets.”

Also, it clearly states that “crypto-assets should not be considered as currency for prudential purposes”, and that “firms should set out their consideration of risks relating to crypto-exposures in their Internal Capital Adequacy Assessment Process or Own Risk and Solvency Assessment.”

The PRA promotes itself as having three clear objectives: “promote the safety and soundness of the firms we regulate”, “contribute to securing an appropriate degree of protection for insurance policyholders,” and the facilitation of  “effective competition between firms.”

Iqbal V. Gandham, chair of industry association CryptoUK, is quoted by as saying that the “the majority of firms within the cryptocurrency sector operate to a high standard, replicating existing models of compliance and best practice for financial services firms.”

“Nonetheless,” he continued, “the concerns raised by the deputy governor support CryptoUK’s calls for regulation, set at an appropriate level that allows firms operating within the sector to grow and flourish.”

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