Ex-Chancellor Philip Hammond on why banks love blockchain, and where Truss went wrong

Why switch to crypto?

During my time as chancellor we thought very carefully about what the post-Brexit world would look like. It changes the way London can operate.

I have always felt that the solution to this conundrum is that, post-Brexit, London has to become willing to take a little more risk, to be a leader in embracing new technologies, new products, new business ideas, to ensure that we have something to offer, which keeps our partners in the EU still committed to London – however much they may want to break away and do their own thing – and which gives us some basis for the claim that London will remain a global financial centre.

Digitization of financial services is not just trading in what we today call crypto-assets, but digitization of the entire financial services ecosystem over time.

How far along the development chain are the institutions, and what do they use the technology for?

It’s early stages. Of course, you have a bunch of financial institutions, including banks, hedge funds, asset managers, and family offices that offer the ability to trade crypto assets and hold those crypto assets safely. It is the core business today that generates the cash flows.

We also see that some banks use blockchain-based systems to make settlements between them. For example, I was in New York a few weeks ago and I was told that Goldman and JPMorgan are using a blockchain-based system to settle bilateral positions overnight.

Has the crypto winter had an impact on what the banks want to do?

I do not think so. Rather, it has actually helped focus attention on the long-term underlying technology and its potential to primarily improve, and ultimately perhaps revolutionize the way financial services work.

The general view across the non-retail side of the industry is that the shake-out has been beneficial and that it has enabled the more serious players to focus on the future. It allows the institutions and infrastructure providers to start thinking of this as a long-term play; it has reduced the noise from the retail market.

Is it an admission that there were too many sub-standard or sub-scale players in the market?

The providers are divided into two camps: those whose business model relies on pitching to retail investors, who tend to be quite hostile to regulation in any form, and those who are in it for a long-term play, who see the construction of a new architecture for financial services as the real prize here, and who very much want the space to be regulated.

We see that others – the EU, the Swiss, for example – are starting to move to properly regulate this space. And I’m a little bit disappointed that the UK is as far behind as it is, because I think that the UK not only has the ability and the experience to be quite good at exploiting regulatory opportunities, but post-Brexit we also have the fire. platform that should give us the motive to go ahead and do this.

I hope that under the new government – we have Rishi Sunak, who was a champion of moving forward in this space as Chancellor – I hope that with him as Prime Minister we will seek that the UK moves to become the recognized leader in this space .

Why haven’t we achieved that leadership yet?

I think our regulators are struggling with bandwidth. After Brexit there was a huge strain on the regulators and I think that chewed up a lot of time and attention.

Second, I think they struggle to recruit and retain people who really understand the environment and the blockchain infrastructure that underpins it.

Third, there have been many distractions during this period, and politicians may not have been as focused on setting the rules for this environment as they could be.

Will it be politically difficult to keep it high on the agenda, when you have inflation and a cost of living crisis, Russia and Ukraine?

It is part of the UK’s growth plan and should be presented as such. That growth plan must have many, many threads.

The Liz Truss government had one simple tool for growth: cutting taxes with borrowed money. That will not happen. The government before that had an agenda around leveling up and making fantastic trade deals with the US. That will not happen.

So I think the current government needs to set a clear direction to do growth the hard way. Getting the right environment for financial services is a key part of that.

This is the UK’s largest economic sector. The future is important for the whole of Britain.

Do you think governments will each launch their own blockchain-based digital currency for legitimate trade and investment?

Different authorities have different incentives here. Without naming any names, some governments are trying to use CBDCs mainly as a way to abolish cash and be able to track all activity on the blockchain. You can imagine the governments that want full public access to the blockchain.

Other governments see it more as an enabler of commercial transactions, and may not yet be undecided whether CBDCs themselves are necessary, or whether an appropriately regulated stablecoin regime would provide the economic benefits of having such a currency without the central bank necessarily has to be directly involved in the matter.

Will growth and investor protection come into conflict whn legislators and regulators pulling in different directions?

There is absolutely no reason why we should not instruct the regulator that one of the targets it must deliver in certain areas is an increasing volume of business in this area.

The easiest thing for regulators would be to shut down the business altogether; there will never be a trade that goes wrong if you have no trades. But the UK’s regulatory regime has, over many, many years, proven to be very good at creating well-regulated spaces that get that balance right.

Have they done enough to utilize experience from the private sector?

I don’t think we have a forum to harvest that knowledge and information. I believe that the only way we can quickly create the bandwidth within the regulator is to set up a regime for private sector deployments.

City firms tell us they’d love to build a crypto team, but they can’t really find anyone who knows what they’re talking about, or they’re incredibly expensive…

I think that’s the way it is. There are two paths for the institutions: They can either try to build internally, or they can take stakes in start-up companies and try to nurture new capacity that way. Some banks use both tactics.

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I think it is very important for the future of this space that we now have full institutional commitment. It’s only been a few years since the big global banks treated crypto as something to be thrown back into the gutter.

The serious players see it as a way to transition the banking sector from the era of double-entry bookkeeping to the era of blockchain.

With muted IPOs and mergers and acquisitions, will it give the banks a kick up the rear?

I think blockchain-enabled trading and custody is primarily a better and more efficient accounting exercise for banks. It requires much less back office facilities, and it means that capital can be used much, much more efficiently.

It is the first victory for the banks. But they can also see that when you move to chain activity, decided in more or less real time, there are great new opportunities for new products and new marketplaces.

Even if we see a crypto spring, won’t the banks just back off when the recession hits?

The large institutions naturally flex their activity in response to short-term pressure and opportunities. But they are also quite good at seeing long-term strategic trends and betting on what are very small amounts of money to them.

American banks with the largest programs in this area can spend a billion dollars. It is chicken feed; I don’t think they’re going to risk being left behind in such a potentially transformative technology.

Will we see you back on the benches fighting for this?

I am in the House of Lords and I intend to stay there. But I will certainly, as these debates go through Parliament, argue for Britain to lead.

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To contact the author of this story with feedback or news, email Justin Cash