A warning has been issued by the Bank of England`s Prudential Regulation Authority (PRA) to CEO`s of all banking institutions in the United Kingdom (UK) desist from getting involved in cryptocurrency market. In a letter issued by PRA on June 28 of this year, they also identified the potential risks associated with banks dealing in cryptocurrency, emphasizing that financial institutions that transact business in cryptocurrency may suffer “reputation risks.”
The above mentioned letter was directed to CEO`s of banks, designated investment companies and insurance business entities. PRA Deputy Gorvenor Sam Woods reportedly instructed that all heads of banking institutions ensure full compliance with established regulatory frameworks that governs the banking sector. He urged CEOs to work with PRA to unravel all the issues PRA may consider important as far as the banking industry is concerned.
According to Woods, the cryptocurrency market has over time experienced swift and substantial and progress. However, he was also quick to bring to the fore two major challenges associated with cryptocurrencies, namely “high price volatility and relative illiquidity.” Woods also stated that the cryptocurrency market is very exposed to a great deal of illegal and clandestine activities such as terrorist financing and money laundering.
The letter release by PRA stated that “crypto-assets should not be considered as currency for prudential purposes,” but discussions are underway regarding the prudential treatment of crypto-assets. Woods also noted that some companies have began processes and in some cases already put in place robust measures to prevent exposure to crypto-assets. He expressed optimism that the letter will bring clarity to bare on key issues regarding cryptocurrencies – such clarity will be ‘brought to the doorstep’ of many banking institutions and other institution that may be contemplating getting involved with the cryptocurrency market.
Risk strategies and management systems
The letter proposes a good number of ‘risk strategies’ and ‘management systems’ that when implemented by financial institutions could help reduce their exposure to the cryptocurrency market and its associated risk factors. PRA in its letter admonishes members of board and senior management not to gloss over virtual currency – related risks during the decision making process.
With respect to banking risk assessment procedure (s) “for any planned business direct exposure to crypto-assets and/or entities heavily exposed to crypto-assets”, PRA proposes that as part of the process, a signing off be done by an individual approved by PRA, stating that
FCA`s take on cryptocurrencies
It will be recalled that earlier this month – June 11, another state institution, UK`s Financial Conduct Authority (FCA) released a letter to financial entities cautioning them to be circumspect of clients who “derive significant business activities or revenues from crypto-related activities.”
The FCA`s letter also noted with concern the proclivity for criminals within the digital financial space to abuse cryptocurrencies while they remain anonymous. The FCA further admonished banking institutions to commit to training employees on crypto-related topics so as to be able to identify possible risky clients who may be involved in criminality. UK`s financial institutions were also asked to seek certainty regarding the viability or otherwise of any given framework to sufficiently capture all crypto-related dealings.
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