The cryptocurrency peaked above $67,000 in early November but suffered a sell-off after news first broke of the Omicron variant of coronavirus. The deputy governor, Sir Jon Cunliffe, said that at the current rapid pace of growth, such assets could become more interconnected with traditional financial services and were likely to pose a number of risks.
The Bank’s financial policy committee, set up in the wake of the 2008 financial crisis to monitor risks, said on Monday that major institutions should take a cautious approach to adopting crypto assets. In a separate blog post published on its website on Tuesday, a member of the Bank’s staff said that bitcoin failed to fulfil many of the features required of a currency and that it risked being inherently volatile. Thomas Belsham, who works in the Bank’s stakeholder and media engagement division, wrote:
“The problem is that, unlike traditional forms of money, Bitcoin isn’t used to price things other than itself. As Bitcoiners themselves are fond of saying, ‘one Bitcoin = one Bitcoin’. But a tautology does not make a currency.
“He said scarcity of the crypto asset – which is limited to 21m bitcoin – is among the key reasons for its attraction for investors, but this feature embedded into its design “may even, ultimately, render Bitcoin worthless.” About 19m bitcoin is currently in circulation, with new coins added when “miners” validate changes to the blockchain ledger underpinning the cryptocurrency.
While the ultimate number of bitcoin in circulation is not expected to be reached until February 2140, it would become harder to sustain this system over time, Belsham said. “Simple game theory tells us that a process of backward induction should, really, at some point, induce the smart money to get out. And were that to happen, investors really should be prepared to lose everything. Eventually.”
Enhanced regulatory and law enforcement frameworks, both domestically and at a global level, are needed to influence developments in these fast-growing markets in order to manage risks, bitcoin encourage sustainable innovation and maintain broader trust and integrity in the financial 19l system,” it said.