28 April 2023

Has the political mood music on crypto changed for good?

By Rolf Merchant

Coinbase CEO Brian Armstrong caused a stir on his recent trip to the UK. At a conference in London, while being interviewed on stage by former Chancellor George Osborne, Armstrong took the opportunity to have a dig at the failure of the US to back the crypto industry and praised Britain’s relative openness.  

The British press was perhaps guilty of overreporting Mr Armstrong’s warm words as a sign that his firm is prepared to quit the US in favour of the UK. Nonetheless, when the head of one of the world’s largest, most influential, and most consequential crypto businesses makes such comments, we should take note. 

The odd thing is that the UK is hardly leading the global race for attracting crypto businesses. This is, if nothing else, a missed opportunity to demonstrate Britain’s tech and innovation-friendly credentials, especially for our vital financial services sector. The UK could credibly be the home for the next significant evolution in how global finance operates, bringing huge kudos – and economic gain.  

The basic case for crypto (a term used roughly as shorthand for blockchain-powered innovation) goes something like this: crypto makes it possible to transfer money via the internet to and from anywhere on earth, virtually instantly, at any time on any day, without having to go via a middleman like a bank, making it far cheaper. It brings an added benefit of protection from identity theft and because it is a system founded on trust it reduces the risk of fraud. 

Crypto has interesting potential in global economic development, too. Digital money can bring many more ‘unbanked’ people into the formal financial system – all you need is a mobile phone. It could reduce remittance fees, the cost of credit, and improve the disbursement of financial aid. 

A more fundamental technological point is that the internet was not conceived or designed for e-commerce, and much of the global payments system is built on 20th century infrastructure. In a digital age, we should have digital money. Part of the vision, then, is for a form of value that is borderless and inclusive – a facilitator of global trade. 

Many countries are exploring Central Bank Digital Currencies (CDBCs) or fiat digital currencies. A UK CDBC, or ‘Britcoin’, has had its share of detractors on this website, but there is a case to be made. For a different view, I would direct readers to Peter Franklin’s discussion of Britcoin’s merits.

Returning to Mr Armstrong’s comments, the reason it seems strange for him to praise Britain’s crypto credentials so richly is because the enthusiasm for making the UK a leader in this area has ebbed. Last April, then City Minister John Glen used his speech at the start of UK FinTech Week to express a desire for the UK to be ‘in at the ground floor’ on crypto technologies. By contrast, at the 2023 edition of the same event, Glen’s successor Andrew Griffith barely mentioned crypto. The word came up a single time in his speech, compared to the 34 mentions Mr Glen gave a year ago.

The Treasury has taken some proactive steps. It is currently consulting on what the regulatory regime for crypto-assets should look like at a high level. But its overall approach has received a mixed response. Some in the industry have suggested the Treasury has been swayed by recent crypto scandals like FTX and is now concerned only about consumer protection. The corollary, some argue, is that any hope of crypto-powered innovation will be extinguished as onerous regulation kicks in. 

Crypto has been mired by scandals, but its defenders argue there is nothing inherently ‘bad’ about the sector. You could argue that long-established financial services are plagued by fraud, but no serious politician thinks mainstream banks or investment houses are peddling scams. The hope is that the sunlight of regulation will be the disinfectant that roots out the fraudsters preying on consumers.

At the same time, the EU has pulled ahead of the UK with the passing of its Markets in Crypto-Assets Regulation (MiCa). It is not thought to be perfect, but having a set of rules to govern cryptoassets and bringing them into the regulatory perimeter is better for business than dealing with uncertainty. MiCa is something concrete for the crypto industry to build on. 

Then there is the ever-green concern about UK regulators moving far too slowly, being constantly one step behind what is happening in the market. The new Regulatory Reform Group picked up on this point in their first report published earlier this month, suggesting regulators don’t understand crypto, and react with a knee-jerk, rather than with a genuine strategy in mind. It’s not hard to imagine officials putting crypto on the ‘too hard’ pile, or kicked into the long-grass into general election territory, and then shelved.

Looking at Labour, who may be in power next year, there is not much evidence of crypto enthusiasm. It is difficult to picture the likes of Rachel Reeves or Tulip Siddiq flying the flag for the industry.

The scepticism about crypto is understandable. I sympathise with politicians and officials here. It is complex and jargon-heavy. Many are still scratching their heads about what this technology is meant to offer, and the often grandiose claims of some of its more enthusiastic proponents.

But as John Glen said last April, it is clear there is something to crypto and that it is worth taking seriously. If the CEO of a leading crypto business thinks the UK is a decent bet, politicians should listen. 

For now, crypto is not flushed with political support. If crypto firms are going to change the political mood music, they need to keep make their case for crypto’s place in the global digital economy and make it compelling.

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Rolf Merchant is a Director at Audley, a global strategic advisory firm.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.