Crypto’s collapse highlights UK policy tensions

It was impressive timing. Just five weeks after Treasury minister John Glen stood up and made an unexpected pitch for the UK to be “the very best place in the world to start and scale crypto-companies”, the crypto markets have experienced a disorderly collapse that has prompted questions about the entire endeavour.

First, a huge slide in cryptocurrencies has destroyed about $1.8tn in circulating value since the peak last November and reinforced the point that most of these tokens are too volatile for anything except speculation.

Then, the implosion of supposedly stablecoin terraUSD, a token that used an algorithm to maintain its dollar value, and the depegging of tether, the biggest and ostensibly fully collateralised stablecoin, have cast doubt on what was meant to be the responsible face of crypto — the bit the UK, at least, wanted to legislate for first of all.

But the Glen speech — accompanied by the gimmicky announcement of a Royal Mint non-fungible token — promised that there was much more to come in making the UK a “global hub” that was “pro-innovation”. 

This was a clear political steer that crypto could no longer be shut out of the system but must be regulated in. The trouble is that no one is sure what that should actually mean, certainly not now.

It isn’t entirely clear why the UK decided to go all-in on a project of such questionable value and limited real-world benefit. But that’s enough about Brexit. Since leaving the EU, the financial policy debate has been coloured by a political desire to be international leaders. And the crypto conversion may have owed something to what the kids no longer call FOMO.

The EU, after all, had already started to define regulation for crypto assets in 2020, itself controversial. After being blocked in the UK, crypto exchange Binance found a warm welcome in France.

One-upmanship is a bad basis for rulemaking — even less so when there is genuine uncertainty about what good policy looks like, or even what the point of regulating here is. Is the primary motivation consumer protection, systemic stability or establishing the UK as a hotbed for crypto business — and how should we deal with the inevitable trade-offs between those concerns?

For a start, the regulator thinks it has already been walking the line between encouraging innovation and laying down some ground rules. The Financial Conduct Authority (and Glen) points to the regulatory sandbox, aped globally, which has supported more than 50 blockchain start-ups. It has been registering groups as part of an anti-money laundering regime. It is likely to get powers over how crypto products are promoted.

The industry, meanwhile, thinks the FCA has already shown itself to be heavy-handed to the point of squashing progress. “Complete nightmare” was the verdict of one adviser on the registration process, which has approved only about a third of applicants. Regulated crypto, for some true believers, may also be an oxymoron: terra, for example, thrived because it was a decentralised stablecoin rather than one tied to fiat assets.

So far, the UK government hasn’t picked a clear side. With even crypto golden boy Sam Bankman-Fried saying bitcoin has no future as a payments network and that most tokens out there have no obvious value, the question is how much crypto really needs to be “regulated in” so as to make the most of blockchain in the financial system.

Regulators last week combined running their first ideas-generating “CryptoSprint” with dark warnings that buyers of assets should “be prepared to lose all the money you invest”. With an eye to future scandals, they want clear political direction (that is, cover) on where the lines should be drawn, including on whether any crypto asset should ever be covered by the Financial Services Compensation Scheme.

The market crash will increase calls for regulation, and may accelerate action. But it also highlights the tensions in giving de facto regulatory blessing to products that authorities really think should only be used by wealthier or professional investors but which many consumers are buying with abandon regardless.


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