Broken Britain can’t afford a crypto bubble
Money talks but funny money shouts and it roared its way into the recent US elections.
Cryptocurrency companies and individuals associated with the sector gave $245m (£194m) to cryptocurrency-friendly candidates, according to Public Citizen, the non-profit, more than any other single corporate sector. Millions more in donations came from Elon Musk, who runs a new key task force named after a joke cryptocurrency.
It is not the first time cryptocurrency has dabbled in politics. Sam Bankman-Fried, the now-disgraced founder of cryptocurrency trading platform FTX, made more than $100m in political campaign contributions before the 2022 US midterm elections, according to prosecutors.
“Great swindlers cultivate political connections,” recalled Edward Chancellor, the historian, after FTX collapsed in late 2022. Chancellor recalled how the South Sea Company, a company associated with a notorious investment bubble in the 1700s, “slipped shares to King George I and bought up members of parliament”.
Three years ago, Trump called Bitcoin a “scam against the dollar”, having correctly identified the dollar’s hegemony as being central to the strategic interests of the US. A year and a bit later, Bankman-Fried left his home in handcuffs and it felt as if the cryptocurrency bubble was well and truly over – a bookend to the era of low interest rates and wild speculation.
Clearly not. Bitcoin has surged to a new record high above $90,000 since Trump’s election and, in an amazing change of heart, the Trump family benefits from its own cryptocurrency enterprise, called World Liberty Financial.
It is a decentralised finance platform that the president-elect promoted heavily during his campaign. “What we want to do is take on a lot of the banking world,” his son, Donald Trump Jr, boasted in August.
Trump is seen as the cryptocurrency president, with expectations that he will do wonders for the industry by forcing regulators to support rather than prosecute cryptocurrency companies.
All this puts our own financial regulators in a difficult spot. In theory, cryptographically secured software systems should be able to perform some of the work of bloated financial institutions more efficiently and cheaply. Participants in decentralised finance claim it does just that, for a fraction of the fees. If there’s any genuine value here, the City doesn’t want to miss the boat.
There is clearly money to be made. Last week, BlackRock’s regulated Bitcoin ETF fund surpassed the value of its gold-backed fund. “It provides an easy way for investors to get exposure to price movements without holding the asset itself,” says Freddie New, the co-founder of research operation ICDEF.
No wonder the City doesn’t want to miss out.
At the same time, retail cryptocurrency is wilder than ever. Protocols and chains are subject to relentless attack, often from North Korea. Scams and frauds proliferate. “Complexity hides fraud”, an observation that dates back to the South Sea bubble, has never been more prescient.
After Bankman-Fried was arrested, we learnt how much of the new world was illusory. Castles had been built on sand and imaginary floating cities pictured on top of those. Once interest rates began to rise, the illusions disappeared in a puff of hot air. In the process, many investors lost money.
City regulators have a dilemma: how to approach an industry that contains both innovation and wild speculation?
One area looks the most empirically solid: stablecoins, tokens which cannot be artificially devalued and are pegged to something tangible, such as a pound or a euro.
At the other end of the spectrum are the spurious meme coins with no existence other than on a spreadsheet, where a keystroke wipes out everyone’s fortune. This is how Bankman-Fried’s FTX fraud was made possible. Another problem is insecure protocols and platforms which are overwhelmed by attackers.
The Bank of England wants to see regulated stablecoins used for payments, while the Financial Conduct Authority says it’s “planning to publish a roadmap for our regulation of cryptoassets shortly, to provide clarity on our work in this area”.
In the meantime, we are in a muddle. Today, cryptocurrency enthusiasts can buy sketchy coins from their sofas via a peer-to-peer exchange, but a regulated UK equivalent to BlackRock’s ETF cannot even advertise.
In fact, introducing regulation is problematic in itself. It has the perverse effect of introducing an element of moral hazard, as speculators think the presence of a regulator offers more assurance than it actually does, causing them to make riskier investments.
A similar dilemma struck car manufacturers when they introduced more automated driving assistance into vehicles. The risk was that drivers would relax, thinking the car would drive itself and stop paying attention to the road.
There’s clearly scope for some enlightened regulation, perhaps, but City regulators on this side of the Atlantic would do well to remember that the US is in a unique position to experiment, while we are not.
JP Morgan recently noted how the Brics countries – Brazil, Russia, India, China and South Africa – were pricing more contracts in currencies that were not dollars. That de-dollarization trend may continue.
But it’s largely a fantasy: the dollar’s dominance is assured. This hegemony affords the US more leeway to experiment with things such as cryptocurrency than Britain. And as the latest Budget makes clear, Britain is too broke to gamble its future away on the hope that cryptocurrency could rescue the City.