London Is Losing The Crypto Race

I have no idea to be honest with you. So I bought a few bitcoin to do my reporting in two thousand thirteen, and at the end of my session I kind of forgot about even the fact that I had bitcoin in the wallet, but also of course I forgot the passwords. But you know, it doesn't bother me as much as it bothers my wife, Francie Laqui in the London studio and I am David Merritt's also in the London studio. I don't know why I hesitated with

my name might be said again, am I friends? And this is in the City, Bloomberg's podcast that connects you to the stories at the heart of the City of London. Week we are focusing on crypto. It's the new asset class and everyone's lives inclueing. My taxi driver last night asking me whether he should invest. And as we take this the price of bitcoin is hovering around twenty thousand dollars after a pretty volatile weekend of trading. Some people

making money, maybe more people losing it. And as we have just heard from Bloombergs Varrio Matt Miller, you lose it all, just be lose your password. It's undeniably a part of the financial landscape and the questions we're exploring this week how the UK currently views crypto, but also how crypto companies currently view the UK as a place

to do business. So we're going to hear from Philip Hammond is a senior adviser to Koppler dot Co. There are London based crypto custodian and trading services provider, and of course, less we forget he was Chancellor of the Exchequer. Now to really sell you on how cryptocurrencies have really grained themselves in our current culture, will bring the story crypto trading goes to rehab. Oh yes, first, for a bit of background, our London based crypto blogger Emily Nicole

joins us and let's stop with this question. How do you gauge where the UK is now? As a crypto destination. Is Britain falling behind when it comes to cryptocurrencies. There's definitely a sense of that by companies, at least on their part, because the UK's regulation of crypto was very hands off for several years, and that's not really the

fault of anybody in particular. The FCA was very clear that it was kind of doing as much as it could within its own mandate in terms of making sure that crypto asset companies abided by money laundering rules, but otherwise there wasn't really much that they could do, and because of that, crypto companies haven't necessarily been given the

guidelines they needed to flourish in the UK. So emily to understand how we got to this point, it's worth unpacking the history of crypto regulation here, and maybe a place to start would be the Financial Conduct Authority's decision to say we cannot regulate crypto and that was back in Was this a game changer? I think it was definitely a stance on the FCS part. They wanted to make it clear that they could only do so much as in their power, and very little is in their

power to regulate this space. So we've got the f c A saying they have no mandate in and in ten they come out and ban crypto derivatives for retail investors. So what's the significance of them taking that start? In terms of crypto derivatives, it's one place where the FSA had a reach where it could say, you know what, that is something that we already look at. That's something we already have powers to handle in the derivative space.

And in terms of crypto investing, back then, yes, you could buy a bitcoin and that bitcoin could be volatile and your the price of your investment could go up or down. But if you're looking at crypto derivatives, retail investors could go on exchanges and buy bitcoin with twenty times leverage and wipe themselves out almost instantly if something

went wrong. And that was the consumer harm they were seeking to limit, and it was the part of the industry where they felt like they had the powers to be able to put those constraints in place, and was a wider impact to that move. The far reaching implications of that, however, today is that even though that ban only applied to retail investors, clearing houses and exchanges in the UK have not been willing to list crypto exchange

traded products for institutional investors either. So Europe has really run far and away with that market. It's been offering crypto ATPs and on bosses like Switzerland and Germany and in Paris for many years. It's a very established market over there, it's one of the most established in the world. And the UK has had real, no real insight into

that at all because of this band that happened. And then was this a change of attitude for the in terms of you know, whether or not that is a u turn from from the FCO, or if they're you know, changing their sentiment. It's still very common that if you look at any f c A speech over the last two years, they will say Crypto is something that is

quite fraudulent. Crypto is something where if you invest anything, you should be prepared to lose all of your money and we don't have any protections in place to keep you safe. So whether or not you know there is any movement there or if they'd be changing that anytime soon, from a regular truerspective, I'd say no. The government, however,

is a totally different ballgame. Well, this is I wanted to explore a little bit the mixed messaging we're getting from the regulators and from the government, and so just to kind of set that up a little bit. So the Treasury came out a few months ago and said we want the UK to be a global crypto hub. And if there is one message I want you to leave here today with, it's that the UK is open

for business, open for crypto businesses. If crypto technologies are going to be a big part of the future, then we the UK want to be in and in on the ground floor. They'd obviously seen some of the reporting around how bad things might have been going for crypto companies here in the last few years, and they're keen to change that because the UK is supposed to be a financial leader, it's supposed to be a technology leader, and if crypto is not part of that, well that

doesn't look very good for them. But it's such a different sentiment and a different voice coming from the government as it is from the Bank of England and the SCA, who are still very cautious. At the fc A, it's still very much you know, there's this sector is right with fraud. We can't protect consumers we need to way more than we can at the moment, and we don't

have the mandate to do so. And what about the Bank of England as the other voice in the mix, because, as you mentioned, the government and specifically the Economic Secretary to the Treasury John Glenn is saying London is open to crypto business, but then the Bank of England Governor Andrew Bailey is less convinced. If you want to invest in and be prepared to lose all your money, that

would be my serious warning. If I thought there was evidence that people saying, you know what, I'm going to put my pension into bitcoin, I would be very concerned. So it seems the Bank of England is just not as on board. If you ask the Bank of England, they're mainly focused on the technology side of things. They're looking at essential bank digital currency and you know, very very slowly, very cautiously assessing whether that's something the UK

wants to be involved in. They've predicted that even if we do decide to go for a digital sterling, it's not going to happen until the second half of this decade. I mean, it feels like the UK is really behind the curve on this. Are the regulators worried about a reputational damage. I think they're definitely worried, and I think it's a little bit of like our hands are tied and we need to find something that can help us

change that. If crypto companies are to kind of feel comfortable basing themselves anywhere, the key things that you would need in place to do that public support from the government and the regulations that are on that are coming down the line, because you can't expect to be in place at the moment, or at least ones that you feel like you could operate safely within that you can feel comfortable hiring hundreds of people and basing your technology here.

And while the UK has a great reputation of supporting its companies in terms of funding and in terms of access to the right people because of its its history with the technology industry, for crypto it is almost the opposite, and there is definitely an element of catching up to do. Bloomberg Crypto Reporter and the Nicole they are giving us a brief history on the UK's relationship with crypto regulation. Now.

We also thought Dave that it would be good to get the take of someone with skin in the game, as they say, and some insight into the inner workings of government. So we spoke with former Child of the Exchequer Philip Hammond. He is now a senior advisor to Copper dot Co. There're a London blaced crypto custodian and a trading services provider. How has it been leaving government.

It's been a mixed emotion, obviously, going through the whole COVID period, watching that unfold from the outside and watching the huge challenges that colleagues who remained in government had to deal with. And the big thing about being outside the government having been in it is that you know what you don't know, so there are non unknowns to to use Donald Rumsfeld's terminology, you know the kind of information that they would have been seeing, but you don't

have access to it. So you would have liked to be in in government. When there's something big to deal with for your country, do you say, oh, you know, thank god it's not me dealing with it, or do

you actually miss being part of the action. So one of the accusations often leveled at me in government was that I was too managerial and not political enough, And actually I think that may very well be a fair criticism, but I think during the COVID crisis, managerial skills were what was required, and yeah, it would have been great to have been there and been able to contribute, but it was not to be. How did you choose what

you were interested in post government? Yeah, and I've I've collected a number of roles, many of them in and around financial services and particularly fintech businesses, because that was always an area of interest to me. And strategically, I think that one of the really crucial questions that will determine the future prosperity of the UK is how successful we are in reshaping our financial services sector to continue

to succeed and to lead even outside the European Union. Obviously, there will be things we can't do as a non member of the European Union. We won't have access as of right to European markets in the future. But historically we've been very agile in embracing new technologies, in in using our regulators in an intelligent way to gain gain a march over our competitors, and that's what we have to do again. But historically, so where are we not

doing it now? You don't think that we're doing in our right in particularly in the area of digital digital asset trading. I feel that the UK has has missed a trick. It isn't too late for us to catch up and recover that ground. But I was saying that six nine months ago, and we are getting very close to the point where it will be too late. Other jurisdictions are racing ahead of us, and this is not

the way it should be. The European Union, with its markets in digital assets regulations, is going to be ahead of the UK. You have to go back a very long way to find a time when the European Union was ahead of the UK in regulating emerging financial markets technology. That has always been our specialty and our strong point, and we need to get ourselves back at the front of the pack. So obviously you were no supporter of the believing the opin union, but you know when it happened,

the decision was made. So but one of the arguments, of course for Brexit was was regulation was not being tied to the beer moth of Brussels to be able to liberate the City of London. But what you're saying is that the particularly as it pertains to crypto, the opposite is happening. Well, as it pertains to everything, it didn't happen. Where has this been? Where has been this

deregulatory tsunami? And of course the truth is because London does still depend very much on access to European markets, not no longer as of right, but that access depends on a broad alignment of UK and European regulatory environments. So look, one of the reasons why I did not support the proposal to exit the Single Market was that I could absolutely understand theoretically the opportunities of a massive deregulatory splurge, but I never believed that, for a variety

of reasons, we would deliver it. But was it about public but have supported or was it deregulation or just smarter regulation? And that's the problem with crypto, isn't it. We need there needs to be a new set of rules, not just ripping up the rules. So about with crypto, it's the problem is the opposite. The problem is that there are no regulations and nobody quite knows where they stand.

It's it's a bit of a wild West and has gained frankly a mixed reputation, particularly among policymakers and politicians and the public people who are serious players in the crypto market want to see a proper regulatory regime in place that weeds out bad practice, protects consumers, and creates a proper set of rules that ensures the system operates fairly, properly and in a in a well protected way. So so what's more essential now? And again we talked about cryptocurrencies,

but this can be bitcoin, ether, tether. At the same time, it's also you know, digital coins for example for europound and things like that. So what's what's important is that we create the infrastructure for digital trading. At the moment, that is all about trading crypto assets, because those are the only digitally traded assets that exist. But getting this right, getting the rules around digital trading right, will be an essential prerequisite for being a player in the digitization of

traditional financial assets. So at the moment, it's about bitcoin, but in one to three I can't tell you how many years time it's going to be about token ized equities, tokenized bonds, trading them over digital platforms with instant settlement very efficiently, very securely. And the jurisdictions that have embraced this technology that have regulated it properly and effectively will be the ones that developed these markets and they will

become the new hubs. And there's anyone doing that now, well, the Swiss, the Europeans are the whole European Union. Well, the European Union regulatory environment is moving to be able to respond to this challenge. The Germans have shown some appetite to move ahead, and the British but well, the the uk f c A is still looking at it,

but progress has been frankly rather slow. The Chancellor has made very encouraging statements about the need for Britain to embrace this technology and to be in the lead, but the reality, i'm afraid hasn't yet matched the rhetoric. It's not too late, but they really do have to move over the next couple of months if they're going to be able to get back into the lead. Does a government need to take a view on bitcoin if it's

going to introduce some of this regulation. Absolutely not. My own personal position is that I am not remotely interested in cryptocurrencies and crypto assets. What I am interested in is using the current marketplace for crypto assets to build the underlying infrastructure that will allow the trading of traditional financial assets over those digital rails in the not too distant future. So why do you think the FSA is late to the game. Partly, it's a bandwidth issue capacity issue.

This is a very new area of technology. It's very difficult for public sector bodies with public sector pay structures to recruit the best and the brightest into these areas. Personally, I think the f c A should have gone to the industry and said we need secondis we can't. You know, we can't hire the people we need. We need the industry to provide us with the talent to work up

the regimes we need to introduce. But I think to be fair to the regulators, it's also that this has been a period of immense stress for regulators that they're dealing with the consequences of Brexit, having to put in place temporary permissions regimes both in wood and outward, and at the same time having to deal with the consequences of covid um and the impact on their own working arrangements.

So I think there's been a bandwidth challenge, but we have to overcome it because if we look at our history, it's clear that one of Our advantage is one of our comparative advantages has always been smarter regulation. The UK does regulation well, whether it's um, you know, financial regulation, whether it's going back a couple of decades, human fertilization

and embryology. We've we've shown time and time again how getting the regulatory environment right, how taking an early move, making an early move, taking a little bit of risk, we can build whole industries and get the UK into a position of leadership. And that's what we need to

do again here now. I mean the f c A would say that as you say, we've got a reputation for the gold standard of regulation and they might not be first out the gate on this, but they're going to build the best system and really protecting It's about protecting consumers, isn't it. And we've seen the volatility obviously

in crypto markets um so far this year. But it sounds like you're saying, really they just is more of a an aptitude on that part you said they don't have the people to do it, that they haven't got this. I think they. I think there's a capacity is. I wouldn't call that ineptitude, but I think there is a capacity issue. But I think we need to distinguish between

retail and wholesale institutional business. What matters for the future of London's financial markets is that we create the infrastructure for digital wholesale trading. Now, I completely agree that there needs to be good quality consumer protection regulation around digital assets. And you know, I take no view on the digital currency markets, but I can see that there is huge

risk in them for retail participants. But let's focus on on the real play here, which is building a wholesale digital financial services market which will allow London to be a leader in the future. And while the FCA's ambition to have the best system is of course admirable, it's no good having the best system that ums, you know, years after everyone else has already taken control of the market.

What we're doing at the moment is squeezing people out of the UK, squeezing operators out of the UK two places like Kenya, British Virgin Islands. If you really care about regulation and having a well managed financial services industry, you would want to keep these people in London, where our regulation will certainly be better and more resilient. After Brexit, we saw the majority of share trading in Europe flipped

from London into utter down. I mean it's crypta. If we can build these this new infrastructure, is it a way to reverse some of that, to make London the trading hub again of Europe despite Brexit or does brexit mean that could never happen again? I think Brexit is a challenge for London regaining its dominance. But if we if we clearly have the superior infrastructure for digital trading, as did little trading attains rapid take up over the next few years, the market will make its own decisions

about where it wants these trading activities to happen. And you know, it's not just about Frankfurt or London, Amsterdam or London. It's about places like Dubai. It's about places like Singapore and some states in the US that are beginning to develop digital trading hubs. Isn't it all about risk and how that there are difficult questions for example, if there's a stable coin that was systemic that would go bust, whether insolvency rules apply to it. Of course

there are. It's not just about consumer protection, it's also about systemic protection, and that's why we need a properly regulated environment for all forms of digital asset trading. Do you think it all come? Yes? How fast? Well? I think it will come globally because so many people are

working on it and committed to it. I still I remain a notist that the UK will prove to be a late starter out of the gate, But when it comes out of the gate, it will move quickly to take leadership and there is still an opportunity to do that. So I hope over the next few months we're going to see the f c A move ahead with its digital regulatory agenda and that you know, next year it will become apparent that London will be the location of

choice for people looking to play in this market. Lord haven't thank you so much for joining in the city. David's headline caught my eye a little while back when we're prepping for this podcast. It could destroy your life crypto trading goes to rehab and that we need to bring this to our listeners. Right, So, if trading crypto means you have to go to rehab, maybe the UK is right to be tightening up the rules for it.

You know, if it's addictive, if it's like smoking or cocaine, you know, maybe you need to regulate it to pay better. Let's bring in personal finance reporter Charlie Wells. So, Charlie, full disclosure. We were I really want you to talk about book coin on the past. So really you're here to talk about your story on rehab centers for crypto addicts. Now it sounds like a joke, but it's actually a real thing. Addiction specialists are offering treatments for a compulsive

crypto traders. I should not be laughing. It's fine, it's new and untest. This is new and untested. What's your story. We throw around the word addiction all the time. People say, oh, I'm addicted to exercise, I'm addicted to chocolate. And one of the addictions that people have been throwing around a lot has been cryptocurrency trading, especially over the past few years, especially over the pandemic period. So me Anda Couli wanted to ask, is this something that you can actually be

addicted to? And we reached out to a growing number of treatment centers around the world that are focusing on this. We reached out to psychologist psychiatrists, and what is really interesting is that over the past decade or so, there has been an increasing emphasis on not necessarily those chemical dependencies that I was talking about, right, cocaine, cigarettes, but behavioral addictions. And what these experts told me was it this kind of falls online with that. I'm charlty. I

mean you have a personal finance with blom Bag. So why is it? I mean, people don't get addicted to ices, do they? Or they don't get addicted. What is it about cryptocurrencies that have this sort of chemical reaction in people's brains. They're new, so that's something they're not necessarily well understood. They're quite volatile, so they go up and

down you get these rewards. And what some of these experts told me was that there are parts of our brain, in particular dopamine receptor number four, which when that is elongated, that can actually be associated with greater financial risk taking. And so in a way, one of these therapists who treats crypto addiction and he actually takes payment in cryptocurrency, he let me know that it's like being at a

roulette table. I was going to say, this feels like addiction to gambling because you can make so much money so quickly. Yeah, Francine, that's a really good point. And you know, gambling disorder has only been in the quote Bible of psychiatry for the past decade or so. And what a number of these experts told me was that, yes, excessive crypto trading. And that's a really important caveat here, right, excessive because cryptocurrency is legitimate, right, there are legitimate investments here.

It's becoming increasingly mainstream. But this excessive trading can resemble gambling disorder. How do you even start to cure that? If you go to a party and say, I'm you know, and rehabilitation because of crypto trading, I mean, you'll get along, you'll get a laugh, and you know, I think that's the risk that some of these treatment centers are taking, right, that people won't necessarily take them seriously. There's one in Switzerland that that charges ninety dollars a week to help

you out with cryptocurrency addiction. There's a one in Scotland that is more reasonably priced in a number around the world. How did you find these compulsive crypto trade? Reddit of course is a huge place for people who trade cryptocurrency these days, right, And there's a particular form where I thought, you know, maybe people here might be talking about some of the downsides of cryptocurrency. The downsides of bitcoin in this form is called butt coin. Oh, here we go.

I'm like a two year old and I find it really but coin is a place where skeptics of bitcoin gatherer to talk about problems with it, to make fun of it, but also to you know, to have some serious conversations. And so there was someone who posted on there about having been addicted and thanking butt coin for helping him. See how much of a joke some of his behaviors were as regards to bitcoin, right, this is bitcoin can be legitimate. I think what I really need

to emphasize to is, you know, we're laughing. It is an incredibly important asset class, right, but it's incredibly accessible, um, you know, compared to some of the much more complicated financial tools that bankers use. It's tradeable in your pocket. So that's very, very different from means from finance. I'm potentially dangerous. Thank you so much. I'm Franci Laqua and I'm David Merritt. That's it for this week's episode of

the City. We will be back next week and in the meantime, if you like the show, Please ease rate it and check out the Bloomberg UK website for more news and views. This episode was produced by Summer Sady and special thanks to our guests Emily Nicole, Charlie Wells and Lord Philip Hamond, and to Matt Miller for reliving the trauma of losing the password to his crypto wold ahead of Bloomberg Podcasts is Francesco Levi