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Bank Of England Warns Banks Against Crypto Asset Risks

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A top official of the Bank of England has warned financial institutions against the risks involved in exposure to crypto assets.

In a letter addressed to the CEOs of banks, insurance companies and designated investment firms, Sam Woods called to take steps to protect themselves against market volatility and potentially risky investments in the crypto space.

Woods is the deputy governor and chief executive of the Prudential Regulation Authority (PRA), a financial services regulatory body under the Bank of England, which is responsible to regulate and supervise around 1,500 banks and financial services firms.

He said Crypto assets also raise concerns related to misconduct and market integrity. Many appear vulnerable to fraud and manipulation, as well as money laundering and terrorist financing risks. Entering into activity related to crypto-assets may give also rise to reputational risks, which are relevant to both the Financial Conduct Authority's (FCA) and the PRA's statutory objectives, he warned.

Woods reminded the firms to "act in a prudent manner, have effective risk strategies and risk management systems, and deal with regulators in an open and co-operative way, and disclose appropriately anything relating to your firm of which we would reasonably expect notice."

The PRA chief set out a number of risk strategies and risk management systems for the firms to follow.

The financial firms have been advised to include the list of risks relating to crypto-exposures in their Internal Capital Adequacy Assessment Process or Own Risk and Solvency Assessment.

He also pushed back against the idea that cryptocurrencies are a form of money, saying, "crypto-assets should not be considered as a currency for prudential purposes."

Woods, however, acknowledged that the underlying distributed ledger or cryptographic technologies, on which many crypto-assets rely, have significant potential to benefit the efficiency and resilience of the financial system over time.

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