They are dangerous, flimsy and are rapidly creating one of the greatest bubbles of all time. That was the gist of a speech delivered by the Bank of England governor, Mark Carney, last week. It was his strongest warning yet about bitcoin and the other developing cryptocurrencies, and it made it clear that in his view the time had come for tougher regulation.
“Authorities are rightly concerned that, given their inefficiency and anonymity, one of the main reasons for their use is to shield illicit activities,” he argued. “This cannot be condoned. Anarchy may reign on the dark web, but in the UK it’s just a song that your parents used to listen to.” Cryptocurrencies are “inherently risky”, he insisted, and may not even function as money at all. The Bank will be working with its counterparts in the G20 to work out ways of regulating the sector.
Of course, it is perfectly reasonable to warn about the dangers. The governor would not be doing his job properly if he didn’t. Bitcoin has been on a wild ride in the past year, soaring all the way to $20,000 a coin before more than halving in the space of a few weeks. A lot of speculators have jumped on the bandwagon, and there is no question there are some flaky operators out there. Whether there is anything of substance behind the hype no one really knows yet.
As a result, lots of central banks have talked about clamping down. But a few have adopted a far more light-touch regime, and even made decisive steps to encourage the growth of digital currencies. Take Switzerland, for example. Zug, one of the most tax-friendly cantons, and already home to plenty of hedge funds, has been unofficially dubbed “Crypto-Valley”.
The Swiss financial-markets authorities have pushed through some of the most entrepreneur-friendly rules for initial coin offerings, a booming market in launching new digital currencies. It has launched a Blockchain Task Force, headed by the finance and economics ministers, with the aim of creating a secure but welcoming regulatory environment for digital currency start-ups, and it has also proposed a “regulatory sandbox”, which will give new companies space to try out new ideas without having to jump through dozens of regulatory hoops first.
Poland has also been relatively welcoming, at least until recently, and Warsaw has more than its fair share of start-ups as a result. Singapore has also moved to embrace the bitcoin culture. The deputy prime minister recently said he saw no reason to ban them until their full impact became clear, and the monetary authority has been keen to allow new companies in the sector to flourish.
It is not hard to work out what the Swiss in particular are up to. The country had a huge finance industry based on a culture of discretion and secrecy. But global money-laundering crackdowns have largely eroded that and made Geneva and Zurich a far less attractive home for people’s money. They need something else to attract new business. The same is true, to a slightly lesser extent, of the Singaporeans. Poland never really had a major finance industry, but it may well see cryptocurrencies as a short-cut to building one.
London is a heavyweight in the capital markets and the second largest financial centre in the world. It therefore needs to maintain standards. If people don’t think the City can be trusted, or that it is properly regulated, then that will do huge damage to its prospects. And yet, it is also a centre for innovation and flexibility, and in that sense should be looking to Switzerland and Singapore as its role models.
Just as ending banking secrecy means the Swiss need to develop new competitive advantages, so the City after Brexit will have to be innovative, flexible and open to new ideas if it is to remain as powerful as it has been for the last 30 years. Sure, there should be caution. No one thinks ordinary investors should be trading too much in cryptocurrencies and there should be checks on new companies. But new currencies should also have the space to develop and experiment.
Some will succeed, and others fail, and money will be lost in the process, but that is what happens with any new technology. It would be helpful if Carney recognised that instead of just playing safe with calls for a clampdown. Simply banning things is easy. Allowing them to grow safely is far harder.