As crypto asset prices began to fall, this has led to large margin calls and automatic liquidation mechanisms – a feature of some protocols designed to protect against risk – that further amplified price falls. We have seen a range of crypto funds taken down by these effects; one of the biggest has been here in Singapore with Three Arrows Capital filing for bankruptcy last week. I could mention other examples – risks that arise from weak governance for example, or the lack of transparency and understanding of investor rights[4]. But the basic point is the same: new technology does not change old risks. The second lesson I take from the crypto winter is that regulators need to get on with the job of bringing the use of crypto technologies in finance within the regulatory perimeter. Or to put it the other way around, the lesson we should not take from this episode is that ‘crypto’ is somehow ‘over’ and we do not need to be concerned about it anymore. I should note at this point that even with the recent collapse crypto assets and crypto markets have not posed a systemic risk, though I recognise of course that this of is little comfort to those nursing substantial losses. That is not in itself a surprise; regulators, myself included[5], made clear, when crypto reached its highs last year, that it was not yet large enough or integrated enough into the rest of the financial system to be an immediate systemic risk.
Of course, the automation of activities through a smart contract raises many questions about how firms and regulators ensure appropriate risk management and resilience. In the UK, the authorities are to establish a regulatory ‘sandbox’ to allow firms to investigate technical feasibility in this area and the regulators to assess related risks and risk management. It is of course impossible to say how successful and how disruptive these technologies will ultimately prove to be in finance. History has many examples of technologies that promised much but failed to deliver. Given the pace of change and the disruption we have seen in other sectors of the economy it would, as I said be very unwise for financial regulators to ignore these developments. But it would also be unwise for innovators and the authorities alike to forget that to be successful and sustainable, technologically driven innovation needs regulation. A succession of cryptowinters will not, in the end, help the deployment and adoption of these technologies and the reaping of the benefits that they may offer. History also has examples of technologies that have been put aside/ shunned because of dramatic early failures. While the causes of the Hindenberg Zeppelin disaster are still debated, it is very probable that the general development of the use of hydrogen in transport was put aside for decades as a result. Innovators, alongside regulators and other public authorities, have an interest in the development of appropriate regulation and the management of risk.