BOE Says Crypto Now Bigger Than Subprime Debt That Led to Crash
Comment of the Day

October 14 2021

Commentary by Eoin Treacy

BOE Says Crypto Now Bigger Than Subprime Debt That Led to Crash

This article by Reed Landberg for Bloomberg may be of interest to subscribers. Here is a section:  

The crypto-currency market is double the size of the sub-prime debt in the U.S. on the eve of the financial crisis and poses a threat unless urgently regulated, the Bank of England said.

Crypto assets are now worth $2.3 trillion, about 200% more than at the start of the year. While that’s still a small part of the $250 trillion global financial system, it’s about twice the size of the $1.2 trillion sub-prime real estate debt market in 2008.

“You don’t have to account for a large proportion of the financial sector to trigger financial stability problems,” BOE Deputy Governor Jon Cunliffe said in a speech on Wednesday.

“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice.”


About 2.3 million adults in the U.K. alone hold crypto assets, a survey by the Financial Conduct Authority showed. Cunliffe said more people see those assets as an alternative to mainstream investments instead of a gamble, and about half intend to invest more. 

Eoin Treacy's view

The vast majority of crypto wallets are open for investment/ trading purposes. Buying one crypto to enable trading in others does not contribute to the proliferation of real-world applications. Volume based on that activity is largely irrelevant to the wider world. On the other hand, borrowing against crypto holdings, leveraging up on investments based off crypto holdings and securitising physical assets using cryptos do have real-world applications.

In a completely unregulated market where leverage of 100:1 is commonplace, there is an unparalleled scope for malfeasance. Those hungry for lifechanging gains are encouraged to take on leverage and automated systems quickly take advantage of over leverage.

Recently, it feels like everyone I meet has invested in crypto or crypto miners. I am willing to accept that Dallas is more of a financial centre than Los Angeles, but the proliferation of people willing to talk about their crypto success is quite striking.

Unregulated markets can succeed for as long as regulation does not exist. The proliferation of Alibaba and Tencent’s deposit taking apps are a good example of that. However, when regulation is imposed the regulatory arbitrage upon which the bull market was based is less convincing. The new assets then have to compete on a level playing field and may or may not succeed.  That’s the primary reason bitcoin has been parasitic on the wider crypto sector of late since smaller projects stand to lose most from regulation.

Meanwhile the biggest risk to the wider sector is when stable coins are reclassified as money market funds. At that point the significant holdings of commercial paper they claim they hold will be open to verification.

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