FTX collapse shows crypto is ‘too dangerous’ not to regulate, Bank of England deputy governor says
Cryptocurrency trading is “too dangerous” to remain outside mainstream financial regulation and could pose “a systemic problem” without action, the deputy governor of the Bank of England has warned.
Speaking for the first time since the founder of the crypto trading platform FTX was arrested and charged with massive fraud, Sir Jon Cunliffe told Sky News the Bank is considering regulation to protect retail investors in the “casino” of crypto trading, as well as the wider financial system from potential crypto shocks.
Sam Bankman-Fried was extradited on Wednesday from the Bahamas to the US where he will appear in a New York court charged with eight counts of fraud, money laundering and breaking campaign finance.
The collapse of FTX left more than one million customers unable to withdraw assets worth an estimated $8bn.
Prosecutors allege he used FTX’s customers’ money to cover losses in his private crypto hedge fund Alameda Capital in what the company’s new chief executive told Congress was “old-fashioned embezzlement”.
An estimated 80,000 of FTX’s customers are based in the UK, with individual liabilities as high as £5m in life savings according to a lawyer acting for dozens of victims.
Louise Abbott, a crypto-fraud specialist, told Sky News: “These individual investors have invested anything from a couple of thousand pounds up to about £5m, so massive amounts of money, all completely frozen, I’m going to use the word frozen rather than lost, because hopefully there is going to be something given back to them at some point. But this is huge money, huge money lost or stuck, or frozen in time.”
Crypto credibility
The episode is a huge blow to the credibility of cryptocurrencies, digital assets that draw their value not from state backing, but from relative scarcity and the willingness of other investors to trade in them.
Mr Bankman-Fried had cultivated links in Washington and on Wall Street, making millions of dollars in political donations and attracting high-profile investors to his platform.
His fall has emphasised the volatility of crypto investment and the lack of regulation in an industry that, despite widespread scepticism, is attracting growing attention from the financial mainstream.
Efforts to regulate
In the UK, regulators have tried and failed to impose their writ on crypto exchanges domiciled offshore, while the government has a goal, set out in April by Rishi Sunak when he was chancellor, to make the UK a “global crypto assets hub”, an ambition that depends in large part on effective regulation.
Sir Jon, deputy governor with responsibility for financial stability, told Sky News the Bank’s regulation efforts were aimed at protecting individuals and maintaining financial stability.
Deputy Governor of the Bank of England Jon Cunliffe
“There’s a lot of activity that’s developed over the last 10 years on the trading and sale of crypto assets, assets without any intrinsic value, so they’re incredibly volatile. And all of that has grown up outside of regulation,” he said.
“What we saw in FTX… is a number of activities which in the regulated financial sector, would have had certain protections. We saw things like clients’ money appears to have gone missing, conflicts of interest between different operations, transparency, audit and accounting. All of the perhaps boring things that happened in the normal financial sector, didn’t really happen in that set of activities. And as a result, I think a lot of people have lost a lot of money.”
Comparing crypto trading to a casino, Sir Jon said investors who wanted to speculate should be able to do so without the risk of losing access to their funds.
“It is in effect, in my view, a gamble, but we allow people to bet, so if you then want to get involved in that you should have the ability to in a place that is regulated in the same way that if you gamble in a casino it’s regulated. You should have the full information on the tin as to what you’re doing.”
The Bank also has to address the risk to financial stability that could flow from digital assets as institutional investors and banks explore exposure to an estimated $1trn in crypto assets.
“This trading of crypto assets was not big enough to destabilise the financial system, but it was starting to develop links with the financial system,” Sir Jon said. “I don’t know how that will develop. But we had banks and investment funds and others who wanted to invest in it. I think we should think about regulation before it becomes integrated with the financial system and before we could have a potential systemic problem.
“So I don’t think it will be possible to say this can be just kept outside of the financial system. It’s too dangerous. I think it is difficult but possible to say, let’s bring it in, where and when we think we can manage the risk to the standards we’re used to.”
Potential for blockchain
While cryptocurrencies have proved consistently volatile since the inception of Bitcoin 14 years ago, the underlying technology, blockchain, is considered to have significant potential across industries to manage data, and speed up and simplify transactions.
Blockchain provides proof of transactions on a public record known as a distributed digital ledger.
Each new exchange of cryptocurrency is recorded on a “block” which is added to the “chain” containing details of the new transaction and the previous transaction, meaning it can only be falsified by altering all previous links.
The system is maintained and overseen by every computer linked to the network rather than a central monitoring entity.
Mercedes is exploring the potential of blockchain to manage the data that will enable autonomous driving, while Vodafone is exploring its utility in managing the billions of micro-transactions that will be facilitated by the next generation of internet technology.
‘Smart money’ could also simplify global supply chains, with the prospect of micro transactions using stable tokens being linked to individual parts in production processes.
“There are technologies here which could, and I stress could, be of real use in the normal financial system, more efficient ways of doing things, potentially more resilient ways of doing things,” said Sir Jon.
“That hasn’t been proven in the crypto world. But if we could provide a regulatory space where people can see if they can develop products using this, we might be able to get the benefit of some of those technologies.”
The Bank of England’s own digital coin
As part of this process the Bank of England is consulting on plans to develop its own central bank digital coin, an electronic version of sterling that would carry the same security as a pound coin, but with the digital flexibility that could one day replace cash.
“Physical cash will always be made available by the bank as long as people want it and many people depend on it. But it’s not fully usable in the way we live now. So the question for the Bank of England is that as the way we as society changes, as we live our lives more digitally, should we continue to provide money to the public which is usable across a range of transactions?
“This would be a digital equivalent of the’ I promise to pay the bearer’ promise, which in the end underpins confidence in money in the UK. Whenever you want, you can turn that money you hold in the bank into basically Bank of England money backed by the state with that promise to pay the bearer.
“We want to ensure that as physical cash becomes less usable in many parts of the economy, perhaps we need to offer something digitally to provide that underpinning.”
A household energy supplier has failed, weeks after it attracted attention from regulators.
Rebel Energy, which has around 80,000 domestic customers and 10,000 others, had been the subject of a provisional order last month related to compliance with rules around renewable energy obligations.
The company’s website said it was “ceasing to trade” but gave no reason.
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Industry watchdog Ofgem said on Tuesday that those affected by Rebel’s demise did not need to take any action and would be “protected”.
Customers, Ofgem said, would soon be appointed a new provider under its supplier of last resort (SoLR) mechanism.
This was deployed widely in 2021 when dozens of energy suppliers collapsed while failing to get to grips with a spike in wholesale energy costs.
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The last supplier to go under was in July 2022.
Ofgem said new rules governing supplier business practices since then had bolstered resilience.
These include minimum capital requirements and the ringfencing of customer credit balances.
The exit from the market by Bedford-based Rebel was announced on the same day that the energy price cap rose again to take account of soaring wholesale costs between December and January.
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Tim Jarvis, director general for markets at Ofgem, said: “Rebel Energy customers do not need to worry, and I want to reassure them that they will not see any disruption to their energy supply, and any credit they may have on their accounts remains protected under Ofgem’s rules.
“We are working quickly to appoint new suppliers for all impacted customers. We’d advise customers not to try to switch supplier in the meantime, and a new supplier will be in touch in the coming weeks with further information.
“We have worked hard to improve the financial resilience of suppliers in recent years, implementing a series of rules to make sure they can weather unexpected shocks. But like any competitive market, some companies will still fail from time to time, and our priority is making sure consumers are protected if that happens.”
Harrods is urging lawyers acting for the largest group of survivors of abuse perpetrated by its former owner to reconsider plans to swallow a significant chunk of claimants’ compensation payouts in fees.
Sky News has learnt that KP Law, which is acting for hundreds of potential clients under the banner Justice for Harrods, is proposing to take up to 25% of compensation awards in exchange for handling their cases.
In many cases, that is likely to mean survivors foregoing sums worth of tens of thousands of pounds to KP Law, which says it is working for hundreds of people who suffered abuse committed by Mohamed al Fayed.
Mohamed al Fayed. File pic: PA
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Under a redress scheme outlined by the London-based department store on Monday, which confirmed earlier reports by Sky News, claimants will be eligible for general damages awards of up to £200,000, depending upon whether they agree to a psychiatric assessment arranged by Harrods.
In addition, other payments could take the maximum award to an individual under the scheme to £385,000.
A document published online names several law firms which have agreed to represent Mr al Fayed’s victims without absorbing any of their compensation payments.
KP Law is not among those firms.
Theoretically, if Justice for Harrods members are awarded compensation in excess of the sums proposed by the company, KP Law could stand to earn many millions of pounds from its share of the payouts.
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‘Many more’ likely abused by Fayed
A Harrods spokesperson told Sky News on Tuesday: “The purpose of the Harrods Redress Scheme is to offer financial and psychological support to those who choose to enter the scheme, rather than as a route to criminal justice.
“With a survivor-first approach, it has been designed by personal injury experts with the input of several legal firms currently representing survivors.
“Although Harrods tabled the scheme, control of the claim is in the hands of the survivors who can determine at any point to continue, challenge, opt out or seek alternative routes such as mediation or litigation.
“Our hope is that everyone receives 100% of the compensation awarded to them but we understand there is one exception among these law firms currently representing survivors who is proposing to take up to 25% of survivors’ compensation.
“We hope they will reconsider given we have already committed to paying reasonable legal costs.”
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Further claims against al Fayed
Responding to the publication of the scheme on Monday, KP Law criticised it as inadequate, saying it “does not go far enough to deliver the justice and accountability demanded by our clients”.
“This is not solely a question of compensation but about justice and exposing the systematic abuse and the many people who helped to operate it for the benefit of Mohamed al Fayed and others.”
Seeking to rebut the questions raised by Harrods about its fee structure, KP Law told Sky News: “KP Law is committed to supporting our clients through the litigation process to obtain justice first and foremost as well as recovering the maximum possible damages for them.
“This will cover all potential outcomes for the case.
“Despite the Harrods scheme seeking to narrow the potential issues, we believe that there are numerous potential defendants in a number of jurisdictions that are liable for what our clients went through, and we are committed to securing justice for our client group.
“KP Law is confident that it will recover more for its clients than what could be achieved through the redress scheme established by Harrods, which in our view is inadequate and does not go far enough to compensate victims of Mr al Fayed.”
The verbal battle between Harrods and KP Law underlines the fact that the battle for compensation and wider justice for survivors of Mr al Fayed remains far from complete.
The billionaire, who died in 2023, is thought to have sexually abused hundreds of women during a 25-year reign of terror at Harrods.
He also owned Fulham Football Club and Paris’s Ritz Hotel.
Harrods is now owned by a Qatari sovereign wealth fund controlled by the Gulf state’s ruling family.
The redress scheme commissioned by the department store is being coordinated by MPL Legal, an Essex-based law firm.
Last October, lawyers acting for victims of Mr al Fayed said they had received more than 420 enquiries about potential claims, although it is unclear how many more have come forward in the six months since.
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