Crypto’s latest implosion shows virtues of UK approach

Spare a thought for Matt Hancock. By the time the UK’s former health secretary is done dodging rats, snakes and cockroaches in the jungle, he’ll emerge to find his pet project also looks a little buggy.

Before the former Conservative MP decided to ritual tv humiliation in the hands of the British public as a means of maintaining his profile, he had espoused loud and clear the importance of crypto to the UK and even the global financial system.

His musings include caps such as “cryptocurrency started life looking like a burgeoning fad.” The market capitalization of global cryptocurrencies below $1 billion has more than halved since he wrote this in January, having already fallen by a third from its peak above $3 billion. barely a year ago.

The general public arrival of crypto was “on the verge of shaking the foundations of the banking industry,” Hancock said. And while the UK should be the “natural place” to embrace and lead this change, our glorious fintech future was hampered by “regulators’ reactionary risk aversion”.

In fairness, Hancock was just reading the play, or at least a play at 11 Downing Street. The Treasury in April show your ambition for the UK to be a “global hub” for crypto, with the promise of a (yet unknown) non-fungible token from the Royal Mint and the suggestion that regulators should do more, faster.

The response has been slow, cautious, bureaucratic and, roughly speaking, correct. This week sudden collapse of the FTX exchangeand the fall of the closest crypto had to an institutional heavyweight in Sam Bankman-Fried, puts a different lens on the supposed failure of regulators to open their arms to this market.

It’s unclear what kind of liquidity crisis FTX suffered to force it into the arms of detractor and rival Binance, what the wider fallout might be, or if this deal will actually happen. But that doesn’t suggest anything good about the development of crypto in the mainstream as its best-known man, who dated celebrities, backed greater crypto scrutiny and speculated about buying Goldman Sachs, saw his business implode in a week.

The potential mass consolidation of the crypto space under the Binance umbrella – a company which the Financial Conduct Authority said last year was “not capable of being effectively supervised” and had “ not answered” to the fundamental questions – also does not imply that its assimilation into Main Street financing becomes easier. Binance has since committed to compliance and reapply for UK supervision.

FCA, either by slow accident or by design, can feel somewhat justified. It has used its anti-money laundering powers alone to roll out a registration regime for crypto companies where only 16% of applications have so far been approved. Celsius Network, the crypto lender, was hard to get accredited in the UK before moving to New Jersey in 2021, then collapsing the following year. The regulator followed up its warning on Binance with one on FTX in September, which had also attempted to obtain a license here.

Explosions elsewhere can be seen as a victory, but crypto’s disregard for regulatory niceties or borders means UK consumers can still be hurt. The FCA pushed for new restrictions on the crypto ads that appeared in every Tube car. His main approach has been to warn rogue companies targeting UK consumers and to point out that those who get into crypto risk losing everything. If anything, he could have shouted louder.

“It would be unfair to smear the entire industry by referring to what is happening to FTX,” one adviser said. “Some exchanges are much more sophisticated and have really thought about these kinds of issues.”

The area complained on painfully slow and capricious licensing while regulatory sources counter that many apps were an unapprovable waste. Similarly, the plan to bring so-called stablecoins into the regulatory system has been accompanied by regulatory whispers that no existing coin will meet the likely standards that will be enforced.

There are many cases where slow regulation fails: the UK is reeling from the revelation of hidden leverage in the pension system, a form of shadow banking risk and the dangerous lure of a supposed security never fully addressed after the financial crisis.

But in a climate where politicians are still considering a power of appeal to overrule regulators deemed overly cautious or stuck in the mud, it’s worth noting where the watchdogs appear to be right.

It’s a jungle out there.

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