Indeed, the average volatility of the top ten cryptocurrencies by market capitalisation was more than 25 times that of the US equities market in 2017. This extreme volatility reflects in part that cryptocurrencies have neither intrinsic value nor any external backing. Their worth rests on beliefs regarding their future supply and demand—ultimately whether they will be successful as money. Thus far, however, rather than such a sober assessment of future prospects, the prices of many cryptocurrencies have exhibited the classic hallmarks of bubbles including new paradigm justifications, broadening retail enthusiasm and extrapolative price expectations reliant in part on finding the greater fool. Far from being strengths, the fixed supply rules of cryptocurrencies such as Bitcoin are serious deficiencies. Fundamentally, they would impart a deflationary bias on the economy if such currencies were to be widely adopted. 16  17  If “those who cannot remember the past are condemned to repeat it” , recreating a virtual global  gold standard would be a criminal act of monetary amnesia. centralised authorities like the Bank of England that supervise them) – reliance is placed on the network and the rules to update the ledger reliably. 15 Satoshi Nakamoto (2008), ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ bitcoin.org, October 2008. 16 For example, the supply of Bitcoin is limited to 21 million units by 2040. In the long run, a fixed money supply may harm the macroeconomy by contributing to deflation in the prices of goods and services, and in wages.

Whatever the merits of cryptocurrencies as money, authorities should be careful not to stifle innovations which could in the future improve financial stability; support more innovative, efficient and reliable payment services as well as have wider applications. 23  On the downside, at present, crypto-assets raise a host of issues around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion, and the circumvention of capital controls and international sanctions. The Bank of England’s FPC is currently considering the risks posed to UK financial stability. And internationally the Financial Stability Board (FSB) will report to the G20 in Argentina later this month on the financial stability implications of crypto-assets. At present, in my view, crypto-assets do not appear to pose material risks to financial stability. This is in part because they are small relative to the financial system. Even at their recent peak, their combined global market capitalisation was less than 1% of global GDP. In comparison, at the height of the dotcom mania, the valuations of technology stocks were closer to about a third of global GDP. And just prior to the global financial crisis, the notional value of credit derivative swaps was 100%. In addition, major UK financial institutions have minimal exposures to the crypto-asset ecosystem. Looking ahead, financial stability risks could rise if retail participation significantly increased or linkages with the formal financial sector grew without material improvements in market integrity, anti-money laundering standards and cyber defences.