For my sins, I’ve been reading Future financial services regulatory regime for crypto assets82 pages of Whitehall’s first verbiage that was recently published, setting out HM Treasury’s plans to rule the clouds and hold back the tides.
It begins with the statutory endorsement of Andrew Griffith, the Treasury’s economic secretary. It reminds readers that the government’s “firm ambition is for the UK to be home to the most open, well-regulated and technologically advanced capital markets in the world”, which “means taking proactive steps to seize the opportunities of new financial technologies”. Furthermore, he believes that “cryptographic technologies” can have a profound impact on financial services and that “by capitalizing on the potential benefits that cryptocurrencies offer, we can strengthen our position as a global leader in fintech, unlock growth and drive innovation.” . He continues p94, as they say in Private detective.
Billed as a “consultation and request for evidence,” the document invites our views on these important issues. As a public-spirited columnist, it would be rude to decline the invitation. So here it goes.
First though, a general point about the tone of the document, which sometimes reads as if it was written by cryptocurrency enthusiasts trying to sound grown up. Therefore, everywhere there is talk of “benefits” (real or potential) and “opportunities” arising from crypto technology. However, nowhere are these supposed advantages explicitly listed. And while there are many references to “risks”, they are always seen in the context of downsides they can, and will, “manage”.
Since it seems unlikely that the massive bands of philosophy, politics, and economics alumni at Treasury would be rude enough to engage in such promotion, I began digging to find its source. It is found in annex B of a previous Treasury document, the “final report” of the Cryptoassets Taskforce. The authors of that report had “benefited from contributions from stakeholders across the DLT [distributed ledger technology] and the cryptoactive sector”, that is, more than “60 companies and other interested parties”. Which, translated, means 60 vested interests.
At the heart of the consultation document are two difficult problems. The first is what to do with trading crypto assets. The other is what to do with the DLT (AKA blockchain) technology that underpins much of the crypto activity.
So what is a crypto asset? Treasury defines it as “a cryptographically secure digital representation of value or contractual rights that uses some form of DLT and can be transferred, stored, or traded electronically.” Bitcoin and other cryptocurrencies are examples. that’s how they are NFTs (non-expendable tokens). Treasury estimates that there are at least 2,000 of these and trading in them has become something of a Wild West inhabited by crazy libertarians, con men, tech enthusiasts and get-rich-quick traders who gather in packs to separate the fools from his life. savings.
The only way to impose a regulatory order in this free-for-all game is to regulate the exchanges that allow crypto tokens to be traded and converted to fiat currency (i.e. real money). The problem for HM Treasury is that it can only regulate exchanges that are based in its jurisdiction and most of them, like the spectacularly insolvent FTX, will be based elsewhere.
The second problem facing would-be regulators of the cryptocurrency sector, what to do with DLT, seems easier in principle to solve. The technology allows sharing and updating records in a distributed and decentralized way. Participants can securely propose, validate, and post updates to a synchronized ledger (a form of database) that is distributed among participants. A blockchain is a particular type of distributed ledger in which cryptography is used to identify and authenticate approved participants, confirm data records, and facilitate consensus on whether a particular ledger entry is valid.
Basically, there are two types of blockchain: permissionless and permissioned. The one that underpins bitcoin is of the former kind: anyone can participate in consensus formation, as long as they have the computing power to solve complex mathematical puzzles. They are built this way as a means to realize the libertarian dream of not having to trust any mundane institution to validate transactions. But that also implies that they are not regulated by design. And of course they warm the planet.
Permissioned blockchains, by contrast, restrict access to the ledger to known parties (banks, for example) who can update it. They’re more computationally efficient, and in a way, they’re just a different type of database. As such, they are relatively easy to regulate.
From here two conclusions arise to the questions posed by the consultation document. The first is that regulation of crypto asset trading can only be done by regulating the exchanges on which they are bought and sold. The UK will have jurisdiction only over exchanges that are based here. Ultimately, regulation will be done by regions that even HM Treasury has no control over. This may be unpleasant for devout believers in British exceptionalism, “global Britain” etc., but it is the reality.
The second lesson is that permissionless blockchains can never afforded within the financial services sector. And that’s okay because the authorized ones will do the job more efficiently and within the rule of law.
what i’ve been reading
philosophically speaking
What if my existentialism lessons were in bad faith? is a beautiful thoughtful—and thoughtful—essay by Robert Zaretsky on the Psyche platform.
talking point
A nice and scathing blog post by Cory Doctorow on his Pluralist site is The Google chatbot panic.
Required action
An open letter from 1,500 computer scientists, software engineers and technology experts is published on the need to regulate cryptocurrencies. worried.tech.
