Crypto’s latest implosion shows the virtues of the UK’s approach
Spare a thought for Matt Hancock. When Britain’s former health secretary is done dodging rats, snakes and cockroaches in the jungle, he will emerge to find that his pet project is also looking a little buggy.
Before the now-former Conservative MP decided on ritual televised humiliation at the hands of the British public as a way of maintaining his profile, he had been vocal about the importance of crypto to the UK and indeed the global financial system.
His musings include such gags as “cryptocurrency started life as a boom-and-bust fad”. The market cap of global cryptocurrencies below $1tn has more than halved since he wrote it in January, already having fallen by a third from its peak above $3tn just a year ago.
The mainstream arrival of crypto was “set to shake the foundations of banking”, Hancock said. And while the UK should be the “natural place” to embrace and lead this change, our bright fintech future was hindered by “reactionary risk aversion among regulators”.
In fairness, Hancock was only reading in the room, or at least a room in No. 11 Downing Street. In April, the Treasury set out its ambition for the UK to be a “global hub” for crypto, with the promise of a (yet unseen) Royal Mint non-fungible token and the suggestion that regulators should do more, faster.
The response has been slow, cautious, bureaucratic and roughly correct. This week’s sudden collapse of the FTX exchange, and the fall to the closest thing crypto had to an institutional heavyweight in Sam Bankman-Fried, puts another lens on regulators’ perceived failure to open their arms to this market.
It’s not clear what kind of liquidity crisis was inflicted on FTX to force it into the arms of rival and rival Binance, what the wider fallout might be, or whether this deal will actually happen. But it doesn’t bode well for the evolution of crypto into the mainstream that its most famous guy, who hobnobbed with celebrities, supported greater oversight of crypto and speculated about buying Goldman Sachs, has seen his business implode in the space of a week.
Nor the potential mass consolidation of the crypto space under the Binance umbrella — a company the Financial Conduct Authority said last year was “unable to be effectively monitored” and had “failed to answer” fundamental questions — that its assimilation into Main Street- finances become easier. Binance has since pledged to become compliant and reapply for UK oversight.
FCA, whether by slow accident or design, can feel somewhat justified. It has used its only powers, on anti-money laundering, to roll out a registration regime for crypto companies where only 16 percent of applications have so far been approved. Celsius Network, the crypto lender, struggled to get accredited in the UK before moving to New Jersey in 2021 and then collapsing the following year. The regulator followed its warning on Binance with one on FTX in September, which had also tried to get a license here.
Blowouts happening elsewhere may be seen as a victory, but crypto’s disregard for regulatory subtleties or limits means UK consumers could still be hurt. The FCA lobbied for new restrictions on crypto adverts which have appeared in every tube carriage. The main approach has been to warn where unauthorized companies are targeting UK consumers and stress that those who dabble in crypto risk losing everything. If anything, it could have shouted louder.
“It would be unfair to tarnish the entire industry with reference to what is happening with FTX,” one adviser said. “There are exchanges that are much more sophisticated and have really thought about these kinds of issues.”
The sector has complained of painfully slow and finicky licensing while regulatory sources counter that many applications were an unapproved mess. Similarly, the plan for so-called stablecoins to be brought into the regulatory system has come with regulatory grumblings that no existing coins would meet the likely standards that would be used.
There are many cases where slow-moving regulation results in failure: the UK reeling from the revelation of hidden influence in the pension system, a form of shadow banking risk and the dangerous lure of perceived safety that was never fully addressed after the financial crisis.
But in a climate where politicians are still considering a recall power to override regulators deemed too cautious or mudslinging, it’s worth noting where the watchdogs appear to have gotten something right.
It’s a jungle out there.
