Crypto alive and well as London rolls out red carpet

After years of suspicion and inertia, UK regulators are coming to terms with the subversive world of crypto. The City of London has a plausible chance of hosting a top global hub of crypto-technology and distributed finance (Defi) – perhaps even becoming the global epicentre – if the various authorities can stop contradicting each other and sort out what the policy is.

This year’s Davos was crowded with blockchain and crypto pioneers, seemingly undaunted by the $1 trillion (£794bn) crash across their industry over the past three weeks. Indeed, the brotherhood is almost triumphant, and the surprising message is how many think London could soon be the new crypto Mecca.

“The UK has taken the line that we shouldn’t stifle innovation and I think it is going to lead this,” said Brad Garlinghouse, chief executive of the American cryptocurrency and settlement system Ripple.

“It is setting the rules of the road and putting up guardrails. We’re not getting that kind of clarity from the US, so that’s why we are going to grow our business in London,” he told me.

Ripple is essentially a payments system in competition with Swift, offering banks such as Santander a faster and cheaper way to send money across borders. In a way, it is banal, and that is the point. Much of crypto is just better plumbing.

London’s crypto dynamism is already visible in job offers. Trackers at Glassdoor say the UK accounts for a quarter of all crypto vacancies in the world, well behind the US but far ahead of any other country. Canada comes third.

It was the Bank of England and London’s enterprising goldsmiths who ran ahead with fractional reserve banking at the end of the 17th century, enabling the agricultural and industrial revolutions, and the quantum leap in global living standards that followed.

We do not yet know whether blockchain will underpin another such secular convulsion, but one should not draw a false conclusion from the May meltdown.

Those of us old enough to recall the vertiginous rise and fall of pets.com and other absurdities of the dotcom liquidity bubble know how quickly commentators wrote off e-commerce as a scam. It was instead the buying opportunity of a lifetime, if you could distinguish the real – Amazon – from mere momentum plays.

Nick Studer, head of Oliver Wyman, said much the same is likely to happen with crypto.

“There is a huge amount of extremely valuable infrastructure that underlies it. Out of the wreckage are some really good businesses and good assets with valid uses,” he said.

The crypto shake-out has been an illuminating stress test. Very bad stuff – algorithmic stable coins with scant collateral such as Luna/terra – has been destroyed. Better instruments have withstood the shock. Some have come through with flying colours.

“We have just achieved what almost no bank could do. We had a 10pc run on our assets over 48 hours and we met every redemption,” said Paulo Ardoino, chief technology officer at Tether.

“We have survived a black swan event like 2008 and run on the bank with no outside help. All of the crypto infrastructure has been under extreme pressure and we proved how solid we really are,” he said, sitting in a chaotic tech-hub in Davos with coffee cups scattered around and hard rock music pulsing through the door.

Tether is a stablecoin linked to the dollar with $73bn (£58bn) of outstanding issuance, backed by collateral held in three-month US Treasuries and commercial paper. It briefly broke its peg during the earthquake on May 12, suffering contagion as algorithmic stablecoins met their fate.

“We could all see what Terra was doing and we were quite upset that it was taking one of the best technologies of the last 12 years and making it fundamentally unstable,” said Mr Ardoino. “It has been clear for years that cryptos need proper regulation. It can’t continue like the Wild West.”

I have some sympathy for this position, even if Tether has been less transparent about its collateral than rival USD Coin, which is today trading at a slight premium to its dollar peg.

Tether has a function and a plausible business case. It is used to buy apartments in Venezuela, or to make payments in Argentina where there is a $200-a-month limit on dollar transactions. Tether is opening a peso-pegged stablecoin in Mexico to cut transaction costs on remittance payments.

“We’re not a stablecoin for Wall Street. There is a whole world out there that does not have such a good banking system, and they have to pay crazy fees,” he said.

You can loosely divide the globe into two blocs: those countries where regulators see crypto chiefly as a threat to financial stability, and above all a threat to centralised state control; and the handful of buccaneer states more inclined to see it as a chance to shake up the old order and make money, albeit with guardrails.

The UK has been migrating crablike from one to the other. The early body language of the Bank of England and the Financial Conduct Authority (FCA) suggested visceral dislike of all things crypto, as if the industry were little better than a money-laundering conduit. Switzerland, Dubai, Singapore, Gibraltar and surprisingly Japan were allowed to get a head start.

The FCA still seems to hate it. As of late April, it had granted just 33

‘The UK is setting the rules of the road and putting up guardrails. We’re not getting that kind of clarity from the US’

‘It has been clear for years that cryptos need proper regulation. It can’t continue like the Wild West’

licences to crypto businesses out of 160 applications.

Zoe Wyatt, crypto chief at Andersen, says the regulators are spooked by risk and driving critical talent offshore.

However, the Treasury is warming to the theme. Rishi Sunak and John Glen unveiled a plan last month to make the UK a “global crypto-asset technology hub”, with stablecoins to be recognised as a legitimate form of payment, all backed by an “infrastructure sandbox”.

It goes beyond merely tolerating cryptos. The FCA has been ordered to carry out “crypto-sprints”. The Royal Mint will issue its own non-fungible token. The tax system will be changed in order to handle Defi lending.

Sheena Shah from Morgan Stanley says the UK has no choice. If it drags its feet, London risks losing its dominance over global currency trading. Crypto companies are a direct threat to the City’s most lucrative niche.

The reflexes in Europe are different. Christine Lagarde from the European Central Bank’s last week declared the crypto industry to be fundamentally worthless. “It is based on nothing.

There is no underlying asset to act as an anchor of safety,” she said.

A leaked “non-paper” by the European Commission calls for a ban on stablecoins once transactions top a million a day. Its forthcoming regulation on cryptos leans towards repression. This is in character. Brussels is hostile to disruptive technology of all kinds. It is captured by vested interests. The commission, forever seeking ways to accrue power, is pathologically resistant to ceding any control to free market forces.

The ambivalence of the US is more of a surprise. Joe Biden issued an executive order in March that looked like a bid for global crypto leadership, but the aspirations were contradicted in the detail. Washington seems to start from the premise that crypto brothers are guilty until proven innocent.

Ripple’s Mr Garlinghouse, who is in a fight with the Securities and Exchange Commission, said the US is failing to do what it did so brilliantly with the early internet in the 1990s when the Clinton administration codified the ground rules of cyberspace. It adopted the principle that there should be “no undue restrictions on electronic commerce” and that parties should be able to enter agreements across the web without government meddling.

“It had huge ramifications and the US benefited enormously. This time the US is out of step,” he said.

Personally, I have mixed feelings about crypto. I cannot see how Bitcoin is anything other than a Ponzi scheme. It offers no usable payment system, and it famously consumes as much electricity as Portugal to run its verification protocol.

But let us not paint all cryptos with the same brush. Ripple is more than 50,000 times more energy-efficient than Bitcoin. We need an ecological tariff that kills off egregious abusers, giving a competitive advantage to the frugal. The industry will sort out its carbon footprint with the right price signals.

What is clear is that crypto’s ordeal by fire over the past month has proved its durability. The City of London cannot ignore it. Her Majesty’s Treasury is entirely right to roll out the red carpet.