Crypto AM’s anniversary celebrations couldn’t have come at a more vital time.
Thank you, James Bowater the Crypto Insider – and congratulations on your fourth anniversary.
Thank you, Lawson, and the whole CityAM team, who have survived the pandemic and are embracing the debate around crypto with aplomb, leaving some of your more traditional colleagues in the rear-view mirror.
You’ve assembled a very broad group with great experts in crypto and some complete beginners.
We’ve even got some people from the FT.
You are all very welcome.
Introduction
I was given Bill Gates’ latest book last week by a friend, and it reminded me of that famous David Letterman interview in 1995.
Letterman asks Gates what you can do on “this internet thing”.
Gates - “You can listen to a baseball game on your computer”
Letterman says: “does a radio ring a bell?”
Gates tries to explain it: “but you can listen to the baseball game whenever you want”
Letterman shoots back: “do tape recorders ring a bell?”
The crowd Laughs at Gates. If you haven’t seen it – I recommend you look it up – just search for Letterman and Gates on the internet.
Bill Gates has had the last laugh.
Like then, as today, people failed to comprehend the effect this new innovation would have on their lives – they did not see the ocean of possibility lurking below the surface.
New innovations have always had to break down barriers and prejudice about how something is done and crypto is no different.
We meet at a critical juncture.
Crypto is feeling the growing pains of a teenage revolution.
Just like the internet in 1995, we’re in the foothills of the revolution.
I care about this fundamentally because I care about Britain’s prosperity.
Britain succeeds when we embrace new technology.
Right now, the overall tech ecosystem is going well. We face macro-challenges but a myriad of micro-opportunities.
Figures published recently show tech investment of $37 billion - up sevenfold. 2X that of Germany and 3x that of French.
VC, PE and M&A deals in the sector are also up by 28%.
Distributed Ledger Technology, and the assets built on the blockchain, are just one of these technologies, but they matter, because of the scale of the opportunity – to disrupt, to innovate, and to change things for the better.
I love the fact that people starting businesses in their bedrooms are now challenging the great incumbent beasts of finance. I love it.
Crypto combines my love of technology, which I’ve had since I grew up and worked in my family’s tech business, and my fascination with finance, which led me to spend five years at the Bank of England.
I love the spirit: and in many ways, the market turbulence of the past two months has made plain the creative tension between the utopian ideals of decentralised finance and the human laws of finance which are as old as the moneylenders of the ancients.
We have seen this market turbulence throughout history, often accompanying a disruptive new financial technology.
And the smart people embrace it. Seek to understand it.
The Mission
That’s what we must do here.
So I’ve made it my mission to make Britain love crypto. Not because I want to urge you to invest – far from it. But because Britain prospers when we embrace new technology – and new financial technology too.
And for all the recent chaos in the markets, we’ve seen this before in crypto too.
This latest bear market is not yet as big a downturn as we saw from the peaks in 2019 or 2015.
We’ve seen very similar falls to other fintech stocks – this isn’t a crypto-only adjustment.
Whilst DeFi volume has decreased from $250bn at peak to $70bn today this crisis has highlighted DeFi's resilience - as it is centralised market players like Celsius and 3AG that have suffered - whilst the core DeFi platforms have continued to provide liquidity and maintain confidence collectively even as individual projects may drop away.
Behind the scenes, tens of billions of liquidations have been executed successfully and on-chain transparency means DeFi market users were more assured of understanding their position and that of their counterparties.
Let’s look at one particular area of focus:
Stablecoins are being tested.
We’ve seen the immutable laws of human behaviour come face to face with our adolescent new kid on the block.
Some people have had to re-learn that if you offer to pay back 1 for 1 then be sure when someone asks for their 1 back you can deliver it.
I am always reminded of the quote from Lombard Street that "every banker knows that if he is ever called on to prove his creditworthiness then he has forever lost it".
The collapse of Luna and the threats to Stablecoins are the modern-day runs on money market funds, or bank runs.
George Bailey (It’s a wonderful Life) would recognise what’s going on right now. Shakespeare wrote about it. It goes back at least as far as ancient Babylon, and this time is not different. New technology. Same behaviour.
Mike Novogratz can get a new tattoo, but we can’t change human behaviour.
I think the interesting question is can DeFi governance fix this?
Can we use new governance to solve age-old collective action problems to prevent a run-on crypto markets.
Let’s take a deep dive into Solend.
Solend was threatened by an undercollateralized whale, whose debt margins could have saturated the market and effectively caused a run on the currency – tanking market positions.
This causes a classic collective action problem of everyone wanting to get their cash out first before the liquidity problem causes a capital problem.
So Solend took a vote on changing the smart contracts to initiate a special liquidation threshold. 98% of stakeholders have now voted for this solution. So it looks like DeFi can self-regulate and protect its stakeholders.
By introducing a defi voting governance, you allow everyone to give a collective verdict on what is the collective good - a small cost of illiquidity to protect a potentially much greater capital cost. One way of looking at it is that this same outcome can be delivered by the Authorities calling a Bank Holiday, as Roosevelt did in 1933; and Putin in 2022 for that matter. But DeFi has managed to pull off an effectively consensual solution.
So far so good.
But look a bit deeper, and maybe it’s not so simple. It turns out 98% of individual shareholders voted AGAINST the collective action - but the 2% who owned most of the capital voted yes. So it worked, but perhaps not as democratically as at first sight.
These are the growing pains of a new, decentralised, governance. Bringing modern technology to meet age-old human behaviour.
It raises important questions around DAO structure and governance, around transparency over effective control and what should be off-limits for governance forums to vote on, and how decentralised KYC can verify DAO ownership validity without revealing identity.
New decentralised solutions to age-old finance problems.
This will be an important area the new Digital Economy Institute that I’m helping set up will focus on.
The Institute has a mission to make the UK the jurisdiction of choice for crypto.
For that, we need three things to happen, and I want to take a moment to set them out today.
First, to build the ecosystem here
Second, an attractive, liberal regulatory regime,
Third, sensible tax treatment.
These three interact, but let’s go through in turn.
First: Ecosystem
First, and overarching, is the goal to build the fintech ecosystem here, and you can’t do that without crypto.
There are many strengths. We have a mature and deep community of veteran VC fintech investors with tonnes of experience. Banks and major, mainstream funds are all taking it much more seriously and have strengthened their teams.
I’m glad the Government is moving in the right direction. I’d pay tribute to the work Rishi Sunak and John Glen are doing, with their team at the Treasury.
I’m seeing high-quality engagement, building on London as the headquarters of finance and of tech, certainly in this time zone.
We have English Law. We’ve seen progressive action on talent, visas, and good mood music.
But there is more to do. We’re losing securities teams to Frankfurt. Dubai, Switzerland and Singapore are snapping at our heels. Binance have announced their European HQ in Paris for heaven’s sake. I’ve heard stories – more than once – of regulators telling businesses to go register in Ireland.
This must stop.
We have huge strengths. But this City has no God-given right to be the HQ for global capital, with the huge benefits that brings.
So let’s build the ecosystem together.
Second: Regulation
Second, regulatory attitude.
It’s no good the Treasury leaning in if the FCA runs away.
In a former life, I drafted the report that led to the formation of the FCA and PRA, in response to the 2008 crash.
We always knew that the risk of carving out a conduct-only authority is the incentive structure would be risk-off because mistakes get criticised more than successes celebrated. Believe me. I know.
But that fact of public life mustn’t get in the way of acting in the public interest.
We should regulate for growth, for high-quality markets, not to avoid failure. We need regulators less fearful of failure.
I applaud the FCA recently saying you shouldn’t invest more in crypto than you can afford to lose. Excellent.
Regulators should warn. Ensure accurate advertising. Sort conflicts and disclosure rules. Deal with systemic risk before it arises – and I think the last two months confirm it hasn’t arisen yet.
Create the market. But don’t block novel businesses just because you don’t understand them, and don’t increase financial exclusion with a patronising attitude to retail punters spending and investing their own money as they wish.
People can rightly invest in equities and currencies to their heart’s content. But there are rules around how the market operates.
And we must grapple with how to ensure defi governance isn’t trampled by centralised thinking that hasn’t caught up with the non-hierarchical governance structures being created.
And when it comes to prudential regulation from the PRA, unlike the now spectacularly concentrated banking system, the key is to ensure that no institution is too big to fail. The best way to reduce systemic risk is if no one entity is systemic.
For all the challenges - and believe me, I hear them - here we have huge advantages. We have a one-stop-shop single system. Good work previously by Andy Haldane and now by Andrew Hauser at the Bank, the excellent recent sprints at FCA - good recent hires. These things matter.
Increasingly the right principles are emerging: Liberal not libertarian; regulate by function; Caveat Emptor; proportionality.
But there is so much to do. A clear, liberal, attractive regime can help make the UK the jurisdiction of choice for crypto and increase consumer protection at the same time.
Let’s take one example.
Since 2020 listed products referencing crypto have been banned in the UK, even though 117 products are available in Europe.
Allowing Exchange Traded Products – ETPs - to reference cryptoassets would combine traditional and digital finance and bring crypto into a regulated and protected environment. At a stroke, these products would create a route for crypto investment through regulated wealth managers – with all the disclosures and other rules that follow. It’s not for every crypto investor, but it would bring crypto into the mainstream.
The best bit is the regulatory environment already exists. We already regulate the use of high-risk assets in structured products – so let’s bring crypto onshore – with all the protections that affords – and stop directing UK consumers offshore, stripping them of protections.
It’s just one example, and there are a whole load to fix to build the attractive, liberal framework we need.
Third: tax.
Third, tax.
We need a stable, attractive, tax regime that doesn’t squeeze the lemon until the pips squeak, but takes a proactive attitude that a smaller part of something is worth more than a larger share of nothing.
How to tax crypto is a policy decision for society, not an operational decision for HMRC.
I’m glad Treasury are now gripping this as part of their corporate tax review – it needs sorting, and fast.
There is much to do.
The revolution is coming. The wise path is to embrace it and shape it to our ends.
Conclusion
After all, with David Letterman, it was Bill Gates who had the last laugh.
In the internet revolution, if you’d bet against the technology even after the dot com crash, you’d have bet wrong.
Who even owns a tape recorder now?
And, used right, crypto is a force for good. Just ask Vlodamir Zolensky and the brave people of Ukraine.
Now is the moment to double down.
The storms show the weak points in the foundations.
And as this storm passes – for this too shall pass – so we should build on these foundations to make the UK the jurisdiction of choice for crypto.
For when it comes to revolutionary technology, from all my experience I know this: it’s not a question of whether it happens or not - it’s whether it happens here or not.
The future is bright and waiting to be built, here.
So, let’s make it happen. We haven’t a moment to lose.
