Bank of England’s (BoE) Financial Policy Committee believes the crypto industry needs more stringent regulations as the crypto market cap’s decline from almost $3 trillion in late 2021 to $900 billion in six months exposes vulnerabilities in the market, Bloomberg News reported July 5.

The central bank reportedly said that the extreme volatility highlights weaknesses such as liquidity mismatches that have caused leveraged positions to unwind as well as fire sales of crypto assets.

While carrying a significant potential to damage the market, the current volatility in crypto prices does not yet pose a risk to the overall financial system, BoE said. However, it noted that inaction would lead to systemic risks as the crypto market’s link to banks and other markets keeps growing.

The bank said:

“This underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets,”

The Bank of England has previously spoken about the potential of the crypto market while expressing concern over volatility.

BoE’s Deputy Governor for Financial Stability Jon Cunliffe commented on the industry’s potential and said:

“I expect crypto technology and finance to continue because it has the possibility of huge efficiencies and changes in market structure”.

However, he continued by adding that crypto is nowhere near being properly integrated with the traditional system because of its volatility.

Current volatility prevents crypto from being integrated into the financial system to harness its full potential because the prices carry the risk of dropping to zero. In the case of full integration, banks would have to mitigate those potential losses.

Therefore, BoE argues that the risk of dropping to zero should be eliminated first, and the best way to do so is by introducing strict regulations.

The central bank is already working on a crypto regulation for the region, according to their announcement in March 2022.

A recent Glassnode report showed that the current bear market is the worst in crypto history. This is the first bear market where Bitcoin and Ethereum traded below their ATHs from the previous cycle.

The report stated that the 2022 bear market is:

“[…] one of, if not the most significant in history, both in its severity, depth, and magnitude of capital outflow and losses realized by investors.”

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