(Crypto-)anarchy in Britain – POLITICO

With help from Derek Robertson

Britain’s Month of Chaos, which reached a crescendo today with Prime Minister Liz Truss’ resignation, has a surprise winner: crypto backers.

The shake-up, and the way it went down – in the form of a financial bailout and bond market chaos – only reinforces the crypto industry’s skeptical narrative about the relationship between governments and the financial system. And when the dust settles, there’s a good chance the government’s next leader will be a vocal advocate of digital values.

For crypto believers, recent events in the UK have historical resonance. Invented as the last global financial crisis unfolded, Bitcoin was first embraced by a group of crypto-anarchists who wanted a way out of the existing system. The first block of Bitcoin transactions ever sent was embedded with a January 2009 Times of London headline, “Chancellor on Brink of Second Bailout for Banks.”

Fast forward to 2022 and suddenly Britain is in bailout mode again. When the Bank of England raised interest rates to fight inflation, the Truss government proposed inflationary energy subsidies and tax cuts for the rich, which were billed as pro-growth. In response, the value of some UK government bonds, called gilts, fell, leading to margins for many pension funds that held them. This threatened to bankrupt some of the pension funds, forcing a bailout of the bond market by the Bank of England, and a reversal of Truss’s budget plans.

Anyway, here are a couple of Times of London headlines from the past few weeks:

How a “safe bet” brought gold markets to the brink

“These pensions were meant to keep your savings safe. Now they were wrong“

One from the FT: “The BoE governor is gambling by insisting that the bond-buying operation will end“

And one from Bloomberg: “UK government seeks to rebuild credibility after BOE Bailout“

You could say they have 2009 energy.

Suddenly crypto looks…stable? A common criticism of cryptocurrencies, and one sometimes cited by regulators (incl Bank of England in July) is their high price volatility.

These concerns surfaced earlier this year when crypto markets collapsed, losing two-thirds of their value in a matter of months. Crypto backers were quick to point out that some tech stocks actually saw sharper declines, including Netflix, which lost 35 percent of the value in a single trading session in April.

Recent events give them an even better talking point: amid the chaos of the past month, the volatility of some long-dated UK government bonds has at times surpassed Bitcoins.

It’s one thing for some tech stocks to show crypto-like volatility. It’s another thing when government bonds from a developed economy—which are supposed to be the low-risk (or even “no risk”) cornerstones of the global financial system—undergo such price swings.

And it is not just the British system that is showing cracks. Other important nodes in global finance, particularly the Bank of Japan, are also under acute stress.

“If Bitcoin was built to provide a plan B, this is a moment where you see the traditional financial and monetary system facing a profound challenge,” said Steven Lubka, CEO of financial firm Swan Bitcoin.

Obviously, long-dated gilts are only one part of government bonds from one country, and cherry-picked examples of high volatility elsewhere do not eliminate the risks associated with a new, fraud-heavy asset class. But at least when it comes to Bitcoin – the oldest, most popular crypto-asset – gilts’ volatility undermines the argument that volatility presents. unique risks, and the mess in Britain plays right into the basic narrative of the earliest followers.

Then there is the question of what comes next. In April, then Finance Minister Rishi Sunak unveiled a plan to make the UK a crypto hub.

Last month, Truss beat out Sunak to succeed Boris Johnson as leader of the Tories, and therefore as Prime Minister, leaving her pro-crypto rival relegated to the sidelines.

But as she tried to cling to power in her final days, Truss was reduced to installing Sunak’s supporters in senior cabinet positions, including at the Home Office and the Treasury.

With Truss out, what happens next at Westminster is anyone’s guess, but Sunak is seen as a leading candidate to succeed her.

The early view from a corner of the House of Lords is that Sunak is the leading contender: “I suspect he is! And the chances are high,” Liberal Democrat Jeremy Purvis, Lord of Tweed, told me via text message. (A crypto-skeptic himself, Purvis plans to raise concerns about its possible use to facilitate human trafficking in upcoming parliamentary debate on a bill to White collar crime.)

There is one crypto casualty in the chaos: Sunak’s Financial Services and Markets bill, which would make way for the regulation of crypto-financial activity in the UK, came up for further assessment in committee yesterday, just in time to get lost in the shuffle as top parliamentary haze-order sat in.

The debate about the appetite for crypto mining for electric power is becoming more urgent in Europe, where the energy crisis triggered by the war in Ukraine is threatens the continent’s the entire economy.

Which explains a paper published by the European Commission this week, recommending that if “there is a need for load shedding in the electricity systems, member states must also be ready to stop mining crypto assets” altogether.

The memo also recommends “an end to tax breaks and other fiscal measures in favor of crypto miners currently in force in certain Member States,” and says the commission is working on developing an energy efficiency label for blockchains.

To activate the warning label, the EU’s draft law on markets for cryptoassets, which was adopted by the parliament. earlier this month, will require crypto mining companies to disclose their energy usage. This could be significant: A report from the White House Office of Science and Technology Policy published last month estimated that since 2018 energy use for crypto mining has anywhere from doubled to quadrupled. — Derek Robertson

In recent months, a bundle of regulators has come up with new recommendations to make crypto more safe, stable and secure.

Late yesterday afternoon, one of the industry’s biggest players threw down his own gauntlet. In a blog post, FTX CEO Sam Bankman-Fried outlined his own vision for “Possible digital industry standards, in its writing meant “to create clarity and protect customers while they await full federal regulatory regimes.” The document is just a series of recommendations for his peers, but it’s a useful window into how crypto titans might think about learning to live with regulation. A few highlights:

• Creates “block lists“to ice out sanctions evaders
• Set an industry standard that would pay hackers 5 percent of what they steal, as long as the rest is returned to customers, as a de facto “bug bounty”
• Ensure that dollar-pegged stablecoins are “backed by at least as many US dollars (or government-issued treasury bills/notes) as there are stablecoin tokens in circulation”

Bankman-Fried also tackles the industry’s biggest existential dilemma, namely how regulators should classify cryptocurrency. He describes FTX’s current system for testing whether the products on the exchange are securities, before saying “Ideally, we would end up in a place as an industry where being a security is not a bad thing: where there are clear processes to register digitally. securities that protect customers while enabling innovation.” — Derek Robertson

Keep in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Steve Heuser ([email protected]); and Benton Ives ([email protected]). follow us @DigitalFuture on Twitter.

Ben Schreckinger covers technology, finance and politics for POLITICO; he is a cryptocurrency investor.

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