The Bank of England’s Sir Jon Cunliffe Talks FTX as Cryptos Fall Again

Key Insights:

• Bank of England talks FTX collapse, DeFi, and digital assets, highlighting the issues behind FTX.
• FTX contagion leaves the crypto market in the red following the Sunday reversal.
• Investor confidence remains dented until there is more clarity on the fallout.

Bank of England’s Sir Jon Cunliffe Talks FTX

This morning, Monetary Policy Committee Member (MPC) Sir John Cunliffe attended the Warwick Business School’s Gilmore Centre Policy Forum Conference on DeFi & Digital Currencies.

The conference couldn’t be at a worse time for those sitting in the Pro-DeFi camp. Bearish crypto market sentiment spilled into this morning, with FTX contagion weighing on the broader market for a second consecutive session.

Sir Jon did not hold back on sharing his views about the FTX collapse and the current state of play for the broader crypto market. In making comparisons to traditional financial firms and instruments, Sir Jon said,

“The first are fundamental issues around how financial institutions should be organized, by which I mean their corporate structure, governance, internal controls, and record keeping. Regardless of their financial service activity – be it banking, insurance, exchanges, clearing houses – regulation in the conventional financial sector imposes stringent/substantive requirements. Supervision aims to ensure that these are implemented.”

Sir Jon went on to say,

“Regulation imposes requirements and constraints on the connections between a financial firm and its affiliates, while also requiring controllers to be fit and proper. In this respect, transparency in corporate structures and the relationships between them is the key foundation.”

Sir Jon added,

FTX, along with a number of other centralized crypto trading platforms, appear to operate as conglomerates, bundling products and functions within one firm. In conventional finance, these functions are either separated into different entities or managed with tight controls and ring-fences.”

Addressing the issue of collateral, Sir Jon said,

“Unbacked crypto assets are highly volatile, given that they have no intrinsic value. They are subject to runs and their value can change very quickly as we have seen in recent months. Moreover, a firm accepting its own unbacked crypto asset as collateral for loans and margin payments, as there are indications may have happened with FTX, creates extreme ‘wrong-way’ risk – i.e. when the exposure to a counterparty increases together with the risk of the counterparty’s default. Indeed, in the case of FTX, there are indications that it could have been a run on its crypto coin, FTT, which triggered the collapse.”

Sir Jon also noted that the UK Financial Conduct Authority (FCA) publicly warned on FTX. The FCA stated that “this firm may be providing financial services or products in the UK without our authorization… you are unlikely to get your money back if things go wrong.”

The reference to the FCA follows the FCA’s proposal to ban crypto exchanges. The FCA has reportedly rejected or withdrawn 85% of license applications from crypto trading firms.

Crypto Market Losses Continue as FTX Contagion Risk Spikes

This morning, the crypto market was down $9.3 billion to $754.7 billion, following an $18.44 billion tumble on Sunday.

A sharp rise in FTX contagion risk has weighed on investor sentiment. Over the weekend, news hit the wires of FTX owing around $3.1 billion to its top 50 creditors and $1.45 billion to its ten largest creditors. The numbers highlight the concentration risk and raise the threat of further crypto platform bankruptcies.

The identities of the top ten creditors are unavailable, meaning that leading platforms could face liquidity issues.

In response, BTC fell to sub-$16,000 for the first time since November 14, with ETH testing support at $1,100.

Investors need to continue monitoring updates on FTX contagion this afternoon.