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The Bank of England (BoE), the UK’s central bank, has warned consumers about the risks of using decentralized finance (Challenge) protocols shortly after the crypto exchange FTX collapsed.

The central bank’s warning came in a speech by Bank of England Deputy Governor Jon Cunliffe at an event hosted by Warwick Business School on Monday. In his speech, Cunliffe argued for bringing crypto business into the regulatory framework.

According to Cunliffe, there are three reasons why it is essential to regulate crypto-related activities now.

The first reason, according to the central banker, is to protect consumers and investors, and to ensure that crypto can be traded in “transparent, fair and robust markets”. He clarified that investors, if they choose to participate in the “highly speculative” crypto market, should be able to do so “with the protections they would get in conventional finance.”

The second reason cited by Cunliffe was related to financial stability and the need to protect the traditional financial system from crypto-related risks.

“You don’t have to wait [crypto] is broad and connected to develop the regulatory frameworks needed to prevent a crypto shock that could have a much larger destabilizing impact,” Cunliffe said, strongly suggesting that regulators should act sooner rather than later.

Finally, Deputy Governor Cunliffe pointed out that regulation could also be used to foster innovation in crypto, and that these innovations could also benefit traditional finance. As an example, he said smart contracts in DeFi have shown they can combine trading, clearing, and settlement functions into a “single, instant contract,” rather than having it executed by different institutions. , as is the case in, for example, the stock market today.

And while he admitted that the latest proposal “may seem counter-intuitive to those who see regulation as opposed to innovation”, the central bank official made it clear that he thinks innovation cannot. develop and be adopted “on a large scale” only within a solid regulatory framework. .

This way, “we can ensure that the benefits of new technologies and new business models actually come from innovation rather than regulatory arbitrage,” the BoE deputy governor said.

Advocacy for CBDCs

Cunliff’s speech at Warwick Business School was not the first time he commented on the crypto market and how the government should get involved. Last year, Cunliffe also made the case for central bank digital currencies (CBDCs) in a report prepared for the G20.

“[…] CBDCs offer the opportunity to start with a ‘clean slate,'” Cunliffe said at the time, while adding that CBDCs open up the possibility “to avoid many of the challenges of today’s legacy technologies and processes. ” related to cross-border payments.

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