The Bank of England has signalled plans to introduce new regulatory proposals aiming to restrict how banks expose themselves to cryptocurrencies by 2026, with financial stability cited as a central concern. David Bailey, the Bank’s executive director of prudential policy, outlined these intentions at the Risk Live Europe conference in London, emphasising a cautious approach towards banks' involvement in crypto assets, particularly those characterised by high price volatility and substantial investment risks.

Bailey highlighted that the UK is likely to advocate for banks maintaining low exposure levels to crypto, viewing a more restrictive regulatory stance as prudent while further evidence is gathered to assess if these standards could be relaxed in the future. This approach reflects increased scrutiny following notable financial disruptions in 2023, such as the collapses of Silicon Valley Bank and Silvergate Bank, both of which had significant engagements with the crypto sector. The Bank of England's forthcoming regulations will be shaped by the Basel Committee on Banking Supervision’s framework, which mandates banks globally to disclose their crypto exposures starting 2026. These Basel rules also recommend that banks cap their exposure to high-risk crypto assets such as Bitcoin to just 1%.

The Basel Committee’s final disclosure framework includes standardised tables and templates requiring banks to provide both qualitative and quantitative information about their crypto activities and related capital and liquidity requirements. This standardisation aims to improve transparency, reduce information disparities among market participants, and support market discipline. The UK’s planned policies will align with these international standards, as Bailey reiterated that the proposals would be "informed" by Basel’s guidelines.

In parallel with the Bank of England’s prudential rulemaking, the UK’s Financial Conduct Authority (FCA) is preparing to roll out a new regulatory regime for crypto firms by 2026. This regime seeks to establish robust standards for transparency, consumer protection, and operational resilience within the increasingly engaged UK crypto market, where participation among adults has surged from 4% in 2021 to about 12%. The government’s draft legislation aims to regulate cryptocurrency exchanges, dealers, and intermediaries for the first time, responding to concerns over misconduct but also attempting to foster legitimate innovation in the sector.

While these regulatory efforts mark significant progress towards imposing greater oversight on crypto activities linked to the banking system, debates persist about the risks and benefits of such interventions. Critics caution that regulatory frameworks could inadvertently create a false impression of safety around inherently volatile assets, potentially leading to continued market vulnerabilities.

Nonetheless, the move to carefully limit banks’ exposure to crypto assets and enforce comprehensive public disclosures reflects a broader global trend towards integrating crypto risk within established financial supervision. Regulators worldwide continue to monitor emerging risks, including those related to third-party service providers like cloud computing platforms increasingly utilised by banks in their crypto dealings. The UK’s coordinated approach between prudential regulation by the Bank of England and conduct oversight by the FCA exemplifies a dual-function strategy designed to protect financial stability while adapting to innovation in the financial services landscape.

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Source: Noah Wire Services