Last Thursday, Sam Woods, the head of the Prudential Regulatory Authority (PRA), wrote to the chief executive officers (CEOs) of various financial institutions to warn them regarding the risks that are associated with cryptocurrencies.
The regulator is part of the Bank of England. It warned that cryptocurrencies exhibited high volatility when it comes to prices. It also raised its concerns regarding the vulnerability of the digital currencies to manipulation and fraud as well as risks of terrorist financing and money laundering.
Woods said that cryptocurrencies may pave the way to various reputational risks and reminded the CEOs regarding their obligations to have effective risk strategies and to act in a prudent manner.
He said that the PRA recommended that companies should recognise that crypto-assets “represent a new, evolving asset class with risks which should be considered fully by the board and highest levels of executive management.”
Woods suggested that remuneration policies around the crypt-assets do not encourage excessive risk-taking and said that because of the complexity of cryptocurrencies, companies should make sure that they fully understood what they were dealing with and carry out adequate risk assessments and due diligence.
Woods said that companies firms should notify their usual supervisory contact of any planned exposure of crypto-assets.
He said that firms should remember that crypto-assets are new and evolving. Accordingly, they should specifically assign at least one member of their staff to this area. The assigned person/team should then be approved by the PRA. He added that companies should also be aware of the financial risk and design their measures on risk management accordingly.
He stated that “discussions are ongoing” including those that are among regulators internationally, regarding the best way to deal with the crypto-assets.
At around 2 pm last Thursday, a Bitcoin was worth $6,120 (£4,680). Last Sunday, the world’s largest cryptocurrency had dropped to $5,786, whereas last December, a Bitcoin was worth $17,900.