Page 1  Reflections on DeFi, digital currencies and regulation speech by Jon Cunliffe Given at Warwick Business Schools’s Gilmore Centre Policy Forum Conference on DeFi & Digital Currencies  Page 2  Published on 21 November 2022  In his speech Jon Cunliffe reflects on recent crypto market developments. He goes on to talk about the work that authorities are doing on the regulation of crypto stablecoins and our work on a potential central bank digital currency. Speech I had intended today to talk about the work the Bank of England, is doing with the Treasury, the FCA on the regulation of crypto stablecoins and our work on a potential central bank digital currency in Sterling. That remains the bulk of what I will talk about today. But between beginning to draft these remarks and delivering them today, we have seen what is probably the largest – and certainly the most spectacular – failure to date in the crypto ecosystem, by which of course I mean the collapse of the crypto trading platform FTX and most of its associated businesses. So I thought it might be worthwhile to start with a brief look at the FTX implosion to frame some of the points I intend to make on regulation of the use of crypto-related technologies to provide financial services and on why, as a central bank, we are actively exploring the issuance of a digitally native Pound sterling.
It is, of course, possible that neither of these two reasons - investor protection and protection against financial stability risk - will be relevant because the very instability and riskiness of the world of unregulated crypto finance, most recently demonstrated by FTX, will in the end ensure that the sector cannot grow. Indeed, some have argued for regulators grappling with the crypto world to keep it outside the regulatory framework to ensure that users’ ‘caveat emptor’ concerns prevents both growth and connection with mainstream finance[4]. And that leads to my third reason. Forecasting the direction and pace of technological innovation is an even more uncertain game than economic forecasting. Promising technologies fall by the wayside; unexpected ones flourish. And technologies combine in ways that cannot be anticipated. But the technologies that have been pioneered and refined in the crypto world, such as tokenisation, encryption, distribution, atomic settlement and smart contracts, not only seem unlikely to go away as our everyday lives become more ‘digital’, but may well have the potential to improve efficiency, functionality and reduce risk in the financial system. A potential example of this is the integration of functions in ‘smart contracts’ that I mentioned earlier. A possible use case for such integration, which has been pioneered in the defi world is the combining the functions of trading, clearing and settlement of tokenised financial assets into a  Page 6  single, instantaneous contract, rather than being carried out in sequence by three separate institutions over a number of day.