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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.”

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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 speaks during the Bank of England's financial stability report at the Bank of England in central London on June 27, 2017. / AFP PHOTO / POOL / Jonathan Brady        (Photo credit should read JONATHAN BRADY/AFP via Getty Images)
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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.”

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Reynolds to hold talks with bosses amid business budget backlash

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Reynolds to hold talks with bosses amid business budget backlash

The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.

Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.

Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.

An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.

Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.

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On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.

“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.

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His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.

Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.

A spokesman for the Department for Business and Trade declined to comment ahead of Monday’s call.

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Markets react on second open after budget – as traders concerned over some announcements

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Markets react on second open after budget - as traders concerned over some announcements

The cost of government borrowing has jumped, while UK stocks and the pound are up, as markets digest the news of billions in borrowing and tax rises announced in the budget.

While there was no panic, there had been concern about the scale of borrowing and changes to Chancellor Rachel Reeves’s fiscal rules.

At the market open on Friday, the interest rate on government borrowing stood at 4.476% on its 10-year bonds – the benchmark for state borrowing costs.

It’s down from the high of yesterday afternoon – 4.525% – but a solid upward tick.

The pound also rose to buy $1.29 or €1.1873 after yesterday experiencing the biggest two-day fall in trade-weighted sterling in 18 months.

On the stock market front, the benchmark index, the Financial Times Stock Exchange (FTSE) 100 list of most valuable companies was up 0.36%.

The larger and more UK-focused FTSE 250 also went up by 0.1%.

While there was a definite reaction to the budget, uniquely impacting UK borrowing costs, the response is far smaller than after the UK mini-budget.

Many forces are affecting markets with the upcoming US election on a knife edge and interest rate decisions in both the UK and the US coming on Thursday.

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Budget: Hostile market response as chancellor suffers Halloween nightmare

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Budget: Hostile market response as chancellor suffers Halloween nightmare

First things first: don’t panic.

What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.

The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.

That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.

In hindsight, perhaps we shouldn’t be surprised.

After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.

But those financial markets are now reassessing how keen they are to lend to the UK.

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The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.

This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.

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Chancellor challenged over gilt yield spike

But the falls in the pound and the rises in the bond yields accelerated today.

This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.

Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.

That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.

The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.

But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.

Rachel Reeves and Chief Secretary to the Treasury Darren Jones prepare to leave 11 Downing Street
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Rachel Reeves leaving 11 Downing Street before the budget. Pic: PA

And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.

And this is where things get particularly sticky for Ms Reeves.

In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.

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Chancellor defends £40bn tax rises
Hefty tax and spending plans a huge gamble – analysis

In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.

Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?

Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.

Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.

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Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.

The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.

A Halloween nightmare for any chancellor.

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