Bank of England: crypto assets could cause systemic risk

The risks from crypto assets may grow to become systemic if the so-called ‘metaverse’ also continues to grow, according to the Bank of England.

In a recent blog post, Owen Lock from the Bank’s resilience division and Teresa Cascino from its Fintech Hub explore how the metaverse and crypto assets will affect systemic risk.

They suggest that an open metaverse will require a means with which to own and transact digital objects which are interoperable between virtual worlds, with crypto assets well-placed to take on the role.

Crypto assets enable verifiable ownership of digital items and, when built to common standards, can move between web applications.

If an open metaverse takes off “households may hold a greater share of their wealth in crypto assets to make metaverse-based payments or for investment purposes, and corporates may increasingly take payments for goods and services in crypto assets, and sell digital assets (eg clothing NFTs) in the metaverse”.

Also, if people are employed in the metaverse, then employment could be affected by risks from crypto assets, while non-bank financial institutions may increase their crypto holdings.

The risks implicit in this scenario are manifold: “balance sheet losses for households and corporates, an impact on unemployment, fire-sales of traditional assets from non-banks to meet margin calls on crypto asset positions, and negative profitability impacts on exposed banks”.

“All else equal, the larger the size of the crypto asset market, the larger the risks are and the more systemic they might become. An important step is therefore for regulators to address risks from crypto assets’ use in the metaverse before they reach systemic status.”