LONDON (Reuters) - Banks and insurers should be wary of crypto assets, because they can be highly volatile and vulnerable to fraud, the Bank of England said on Thursday.
Interest in cryptocurrencies like bitcoin surged last year as prices rocketed. Then they tumbled in recent months, triggering warnings from regulators across the world.
Sam Woods, the BoE deputy governor responsible for financial supervision, said the range of products and market participants related to crypto assets has grown quickly.
"In their short history, crypto-assets have exhibited high price volatility and relative illiquidity," Woods said in a letter dated June 28 to the chief executives of banks and insurers he regulates.
"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."
The BoE expects companies to inform their usual supervisory contact of any planned crypto-asset exposure or activity, together with an assessment of the risks associated with the intended exposure. Risks from crypto assets should be considered by the corporate boards and executive management.
Those under the regulator's senior managers regime - which makes them personally accountable for their actions - should be actively reviewing and signing off on the risk assessment for any crypto assets, Woods said.
"Firms should conduct extensive due diligence before taking on any crypto-exposure and maintain appropriate safeguards against all the related risks," Woods said.
In addition, salaries and bonuses should not be structured in a way that encourages people to load up on crypto assets, Woods said.
Regulators from different countries are discussing how to treat crypto assets to determine how much capital banks should hold to cover the risks they pose, or what other actions should be taken.
So far, there has not been a strong enough consensus to take coordinated action.
"We will communicate any supervisory or policy updates on the prudential treatment of crypto assets ... for banks if deemed necessary, in due course," Woods said.
The BoE's Financial Policy Committee, which studies risks to the overall financial system, said in March that crypto assets don't pose a material risk to financial stability in Britain.
(Reporting by Andy Bruce and Huw Jones; editing by Sinead Cruise, Larry King)