The Bank of England has called for "urgent" new regulations on cryptocurrencies in a warning that the digital asset could cause the next financial crash.
Crypto experts react to this warning here.
Speaking at Sibos, the thought leadership focused event for the financial community, on 13 October, deputy governor for financial stability, Jon Cunliffe, said: "There are well founded concerns around unbacked cryptoassets in relation to investor protection, market integrity and financial crime.
"Investors losing money on speculative investments does not, in and of itself, constitute a financial stability problem, though it may well be a major concern for authorities responsible for investor protection."
Cunliffe said a massive collapse in the price of cryptocurrencies to as low as zero is 'certainly a plausible scenario' and that there was 'a possibility of contagion' across the global financial sector.
He added the hit to individual investors if cryptocurrencies collapse would be unlikely to cause a 'financial stability risk'. But he added: 'The picture is less clear for financial institutions.'
He compared a possible crypto crash with other financial meltdowns, and highlighted that the crypto market is now worth £1.7trn, larger than the sub-prime mortgage market in 2008 when it collapsed.
Cunliffe highlighted work already begun by regulators, such as the UK's cross-regulator Cryptoassets Taskforce, but warned: "It needs to be pursued as a matter of urgency."
He further said, given the unbacked and volatile nature of cryptocurrencies, the implications of a major price correction posed a "more direct" threat to financial stability.
"Such major corrections have been relatively frequent in the short lifespan of unbacked cryptoassets", he said.
Elsewhere, new controversies regarding Tether are likely to cause short-term volatility in the cryptocurrency market, affecting the prices of Bitcoin, Ethereum and others, according to Nigel Green the CEO of deVere Group.
Tether is a stablecoin, meaning it is pegged to a currency, in this case the US dollar. Stablecoins' name highlights the idea that the peg supposedly makes them less volatile than cryptocurrencies such as Ethereum or Bitcoin, which can vary widely in value.
When a stablecoin is established, there is a reserve for the assets, which are held as collateral.
"Exactly how Tether is backed, or if it's truly backed at all, has always been a mystery," Bloomberg said in a report.
"There are now 69 billion Tethers in circulation…That means the company supposedly holds a corresponding $69 billion in real money to back the coins—an amount that would make it one of the 50 largest banks in the U.S., if it were a U.S. bank."
Tether has hit back, writing on its website that the Bloomberg story displayed a "complete lack of diligent research and is filled with outlandish anecdotes that are not geared toward ethical reporting but character assassination."
Green said: "The accusations contained in the report include that its chief financial officer Giancarlo Devasini has used the company's reserves to make investments and, in addition, issued crypto-backed loans worth billions of dollars.
"If true, this would directly contradict Tether's overarching public position that the digital assets were fully backed at all times by dollars."
He continues: "This latest controversy surrounding Tether - which has had a series of recent run-ins with the U.S. regulators - and the fact that despite this damning Bloomberg report, the company backing the cryptocurrency is still refusing to disclose where its money reserves are kept.
"This fresh row is going to temporarily dent investor confidence across the wider digital assets market, which will lead to a short-term bout of volatility.
"The turbulence triggered by the Tether troubles is likely to weigh on the prices of cryptocurrencies including Bitcoin and Ethereum, pulling back slightly the impressive upside run that they have been experiencing so far this month."
The controversy, he says, will act as a catalyst for greater regulatory scrutiny of stablecoins and this too "will drive volatility."
Despite predicting increasing jitters in the near term, the deVere CEO remains bullish about the major cryptocurrencies.
"Although investors will be carefully monitoring the ongoing Tether issues, I'm still confident that if the current momentum in prices continues, we could see the Bitcoin price hit new all-time highs of $100,000 this year."
Green concluded: "Tether and other stablecoins are geared towards investors who may not have the stomach for the volatility associated with Bitcoin, Ethereum and other cryptocurrencies, which can swing widely in value.
"But recent events indicate that the term ‘stablecoin' could be misleading, because they are not necessarily as stable as many investors believe."
