Programme Updates

COVID and Brexit: Stablecoin – has the horse bolted?

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Digital currencies are hardly out of the news these days. On the morning of this roundtable discussion, two stories appeared in the UK media about cryptocurrency. The first was the report that Transport for London had banned an advert which said: “If you’re seeing Bitcoin on the underground – it’s time to buy.” Branding the ad “irresponsible” the Advertising Standards Authority said it was misleading because it “gave the impression that Bitcoin investment was straightforward and accessible” whereas, in reality, cryptocurrency trading was “complex, volatile and could expose investors to losses.” So no room for caveat crypto emptor in the land of Bitcoin.  

The other was a Financial Times article involving interviews with some opportunistic City headhunters. The Rush to Crypto Jobs is at full speed, apparently. “We’re poaching people from banks, whereas it used to be banks poaching people from us,” said Delfos Machado Neto, managing partner at crypto investment firm Dunamis Trading, which trades cryptocurrencies, in Sao Paulo. “It’s a lot easier to attract people.” He said offering equity in crypto firms was a common way of attracting talent and the past year’s boom in the crypto market means firms now have to offer less equity than before.

“Putting some of your salaries in bitcoin isn’t going to be the gold at the end of the rainbow,” said Keith Daly, a fintech recruiter in the US, in the same FT piece. “For top talent, it is really about getting that equity early on in the company.”

Technological change is upending finance. Bitcoin has gone from being an obsession of anarchists to a $1 trillion asset class that many fund managers insist belongs in any balanced portfolio. Hoards of digital day-traders have become a force on Wall Street. PayPal has 392m users, a sign that America is catching up with China’s digital-payments giants.

However, the least noticed disruption on the frontier between technology and finance may end up as the most revolutionary: the creation of government digital currencies, which would attempt to let people deposit funds directly with a central bank which would bypass conventional lenders. The Bank of England is on the case and ahead of the game in this area. 

These “govcoins” are a new incarnation of money. They promise to make finance work better but also to shift power from individuals to the state, alter geopolitics and change how capital is allocated. 

Bitcoin has value because people find value in it

Paul Rolles

This conversation was the latest Jericho Chambers event in the Double Wicked Challenge series supported by Stifel. 

Eithne O’Leary the President of Stifel, Europe opened the conversation. “We are struggling to get back to normal after the pandemic,” she noted, “and yet normal isn’t quite where it was before we had ever heard of COVID. Things are moving on at a pace. One thing that has changed is that it looks certain inflation is back after an absence of many years. This factor will increase the popularity of cryptocurrency as a hedge against it.

“But distributed ledgers and crypto are very different. The Swedish banks have gotten ahead. Revolut, for example, has reduced transaction costs but we’re talking about different things. Bitcoin is not that different to gambling in one respect – and people have the right to lose money. But should you try and prevent people from losing money? It’s an issue about consumer protection versus freedom. Trust is a two-way process. 

“There will be a new search for “firm” or “steady” money. But we have a way to go. Who can tell me how much Bitcoin I require to buy a pint of milk? And, indeed, how many I will need tomorrow or next week.” 

Professor Jonathan Haskel is a Professor of Economics at Imperial College Business School and a current member of the Bank of England Monetary Policy Committee. He’s also the author of Capitalism Without Capital, a widely praised book that looks at the rise of intangible assets in business. “A huge part of these intangibles arises from digitisation,” he said. “Amassing valuable insight from data has become much easier than previously. An important part of this is the growth of financial assets, one part of which is crypto. Echoing what the governor of the bank said recently, crypto has no intrinsic value. So, with regards to public policy what do you do with it? Should the public sector provide a public currency? Should the B of E launch a digital currency? We may be closer to this than many people realise but it would not replace traditional banks.” 

Professor Haskel was echoed a few days later by the Bank itself which declared that stablecoins — cryptocurrencies pegged to other assets — must be subject to tough scrutiny. The BoE said it had not yet decided on its regulatory approach to stablecoins, but that it expected issuers of the assets to have sufficient reserves backing outstanding coins and to offer owners one-to-one redemptions for traditional cash. “The prospect of stablecoins as a means of payment . . . [has] generated a host of issues,” said BoE governor Andrew Bailey. “It is essential that we ask the difficult and pertinent questions when it comes to the future of these new forms of digital money.” In its paper on the subject, the BoE said that companies offering stablecoins should not enjoy “regulatory arbitrage” through looser rules than traditional banks.

Paul Rolles has a wealth of experience in conventional banking but is now the Chairman and Co-founder of Fintech Hyperjar, “The first-ever money management app built entirely around you and your life.” 

“Bitcoin has value because people find value in it,” said Paul. “How you assess that value is a matter of opinion – just like an opinion on the quality of a piece of art, or arguably, more importantly, your opinion on other people’s probable opinion. One aspect of this assessed value might be peoples belief that Bitcoin may become accepted as a currency by others. I’m sceptical about this.”

“Central Bank digital currency is different and will represent a usable currency. Why do people care? Primarily reduction in transaction costs, regulatory costs and fraud costs – removing friction from the system caused mainly by moving funds between disparate ledgers managed by banks. The payments industry, the PRA, the FSCS, bank regulations are all there because the consumer is in the middle of the fiscal sandwich between the central banks and banks. So since cost reduction is obviously a very good thing, the only real question is what is the impact of moving to CBDC for current banks and current deposit-based lending models? Also, are any of these frictional costs really visible to the consumer day today? Probably not. Are there other really cool implications for product innovation around CBDC – we believe that there are.”

Denise Kingsmill was a definite sceptic asking if Bitcoin wasn’t simply a Ponzi scheme in disguise – “The difference between a Bitcoin and a ten-pound note is that the Bank of England is underpinning the tenner.” 

Trust was clearly a central issue brought up by many participants.

Professor Angie Hobbs of Sheffield University noted: “I’m a philosopher so this is an unusual area for me but it’s certainly full of public and private ethical challenges. The ethical questions are highly complex – privacy, libertarianism, volatility which might help a small group of people who make a huge amount of money, irrelevant to the rest. I think public cryptos are very interesting, private ones ethically a non-starter. We’re talking about trust – we know that currencies only work due to trust. But trust is only useful if it’s based on clearly understandable and accurate facts. If it isn’t, then unfounded trust is going to do an enormous amount of damage – just look at 2008. I would like to know how central banks can make cryptos clearly understood by people who are definitely not experts – not reserved as a niche thing for a few people to make money. To have widespread take-up you need clarity and transparency.

Mikael Down of the Financial Services Culture Board questioned the wider implications of banking disintermediation – “If you take banks as institutions out of the frame, what implications might this have for financial inclusion or access to lending for individuals or businesses without an established credit history? If you lose the vast amount of information and oversight that banks have of their customers’ spending patterns and behaviour, what data would be used to fill the gap, how would this be sourced, and what would the ethical and societal implications of this be?

Vicky Pryce answered Mikael’s question directly. “If the government takes over the digital currency space by creating its own, the balance of power changes dramatically with the government also deciding your individual credit risk if it also starts engaging in direct lending. Most people use private currencies but think they are public currencies – because for banks there’s a deposit scheme behind them and the state steps in, if there is a problem, as happened during the financial crisis. But in the end, it comes down to a question of trust. A central bank digital currency would mean that your transactions are no longer private and there could well be a backlash if say the tax authorities then dipped into your account, for things such as overdue tax payments, without warning – the idea that HMRC may be given the right to do so a few years ago raised a big storm! The issue therefore will centre around one of trust. Some people use crypto because they don’t trust their own currencies – the same as people using the dollar or euro rather than native currencies in a number of countries around the world.”

Ruth Sunderland of The Daily Mail expects regulation ahead – “It’s not realistic to expect people to be sufficiently informed that caveat emptor is a reasonable approach. Regulators are having enough trouble fulfilling their existing remit and this should expand considerably. If trust is competence plus honesty – traditional banks have often fallen short on both.” 

On the subject of trust, Jane McCormick brought up the subject of China which has recently made its displeasure with cryptocurrencies quite clear. “China hates Bitcoin,” she said. “Because despite its theoretical traceability they cannot trace all transactions. They want to be able to check on everything about their people. They have experimented with blockchain for VAT, for example. The technology is great to buy from a regulatory perspective we have to ask – how to get the good bits and not the bad.” 

Lama Zaher reminded us of the need for a non-First World perspective – “Here in Lebanon, things look a bit different. Trust is thin in the public and private sector. Our central bank played a Ponzi scheme using deposits and we lost the value of our currency. So, what I’d like to know is what role crypto/government digital currency might play in the under-developed and developing countries. Money is terribly volatile here already but that’s down to mismanagement and corruption. The Central Bank has been trying to roll out a digital currency for a while now, no one in Lebanon wants anything to do with Lebanese banks or Central banks at the moment, digital or traditional – it doesn’t matter.” 

The difference between a Bitcoin and a ten-pound note is that the Bank of England is underpinning the tenner.

Denise Kingsmill 

One thing is clear. Pandemic and its resultant depressions of economies the world over have left governments short of revenue. In early June the U.S. Internal Revenue Service Commissioner, Charles Rettig, made it clear that he wanted Congress to provide clear statutory authority for the tax agency to collect information on cryptocurrency transfers valued at over $10,000 that largely go unreported. “I think we need congressional authority,” Rettig said in testimony to the Senate Finance Committee. “We get challenged frequently, and to have a clear dictate from Congress on the authority for us to collect that information is critical.” He said cryptocurrency market capitalization is over $2 trillion, with more than 8,600 exchanges worldwide, “and by design, most crypto virtual currencies are designed to stay off the radar screen.”

Shortly after this roundtable discussion came the news that the US Government has managed to retrieve most of the Bitcoin that was used to pay off the Colonial Pipeline hackers. The immediate effect was to depress the price of Bitcoin by 10%.

It could be that we are now beginning to see disruption of the key selling points of cryptocurrencies, as a sort of reality check, as their security is compromised. Bitcoin was supposed to liberate its users from government controls. The fact that the US Government has managed to recover most of this ransom, despite it being paid in Bitcoin, illustrates a different reality. It is impossible to argue that the cryptocurrency is completely decentralized and free from government control when a state entity can seize it – even when the accounts are held outside of their country.

Despite this, this seizure may have opened a can of worms, that changes the way that people fundamentally view cryptocurrencies from now on. No longer are they untouchable assets. In fact, on the contrary, they are some of the easiest assets to trace, meaning that government can step in and recover funds; easier to find than the cash after a bank robbery. However, this also means that there is the potential for governments to dictate what cryptocurrencies can be used for and so disrupt any payments that go against this, effectively leading them to be controlled in much the same way as fiat currency.

Economics is supposed to be the science of identifiable cycles. There is the business cycle and the inflationary cycle, the rhythms of housing booms and credit busts. But even the earliest economists acknowledged that divining financial fortunes requires as much knowledge of unpredictable psychology as of measurable facts. In “Extraordinary Popular Delusions and the Madness of Crowds,” first published in 1841, Charles Mackay examined a series of economic bubbles and showed that many of them had little to do with underlying economic forces; they had often been caused by the actions of buyers and sellers who, like others, “believed the prophecies of crazed fanatics.” 

A century later, John Maynard Keynes wrote that the marketplace is frequently guided by “animal spirits” that “depend on spontaneous optimism rather than a mathematical expectation.” Financial affairs have an “instability due to the characteristic of human nature.” We’ll never know whether JMK would have indulged in a discrete flutter on Bitcoin. 

Participants in the Roundtable included:

  1. Mikael Down, Executive Director for Assessment, Policy and Insights, Banking Standards Board
  2. Gwyther, Partner, Jericho Chambers
  3. Jonathan Haskel, Professor of Economics, Imperial College Business School
  4. Angie Hobbs, Professor of the Public Understanding of Philosophy, University of Sheffield
  5. Lord Chris Holmes, member of the House of Lords and Paralympian
  6. Wendy Jephson, Head of Research & Ideation – Market Technology, Nasdaq
  7. Baroness Denise Kingsmill CBE, Chair, Non-Executive Director and Board Advisor
  8. Madison, Kominski, Investment Banking Analyst, Stifel
  9. Jane McCormick, Former Head of Global Tax. KPMG
  10. Simon McDougall, Deputy Commissioner – Regulatory Innovation and Technology, ICO
  11. Eithne O’Leary, CEO, Stifel Europe
  12. Chi Onwurah MP, Shadow Minister for Science, Research & Digital
  13. Sanjay Patnaik, Director Center on Regulation and Markets, Brookings Institution
  14. Vicky Pryce, Economist and Business Consultant, Board Member, Cebr
  15. Paul Rolles, Chairman and Co-Founder, HyperJar
  16. Lesley Smith, Vice President of Corporate Communications & Public Affairs, Revolut
  17. Ruth Sunderland, Business Editor, The Daily Mail
  18. Baroness Wheatcroft, Member, House of Lords
  19. Lama Zaher, Managing Partner, Beyond Innovation and Technology – Bit



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