The City is missing a trick, says Matthew Lynn. London is the natural home for the growing cryptocurrency industry.
Wyoming is mostly known for cowboys and ranches. It is the second least densely populated American state after Alaska and its only major attraction is Yellowstone National Park. It has lowish corporate taxes, and light regulation, which means that it is sometimes used to shelter money, but otherwise it doesn’t have much of a tradition as a finance centre. That might be about to change, however. In May, the state formally passed into law legislation that will make it one of the world’s most attractive crypto-centres.
It has created a new legal class of asset known as a “utility token”. This means that bitcoins or other forms of electronic money don’t have to be categorised as either a commodity or a security, and don’t have to be regulated like them either. Blockchain transactions will be excluded from state securities law, and dealing in the currencies will be exempt from trading and property taxes. The result? The state is already attracting tech start-ups, and so it may well be able to diversify its economy out of ranching, mining and tourism.
Welcome to Crypto Valley
Zug, one of the cantons in Switzerland, is doing something similar. It has already formed the Crypto Valley Association to market itself to cryptocurrency fans and has became the first government in the world to accept bitcoin for paying taxes. It has already established guidelines for accounting in cryptos. Last year 35 initial coin offerings, as new crypto launches are known, were staged in Zug alone, and plenty of established companies have set up a base there.
London is missing a trick here. Neither Wyoming nor Zug are exactly major financial centres, nor do they have much in the way of a banking, legal or technology infrastructure to allow new companies to scale up quickly. Neither are they among the world’s most exciting places to live. On any measure you care to think of, London beats all of them by a wide margin.
Yet the city doesn’t yet have any pro-active crypto legislation. Apart from the occasional dire warning about a bubble, very little has been done to bring digital currencies into the open and create a secure legal basis for trading in them. That’s a mistake. We should be making this country an attractive base for cryptocurrency start-ups. Wyoming has already provided a pretty good template. Why not make the industry tax-exempt while it is still a fast-growing one and then impose some levies later on if they seem necessary? And why not make taxes payable in bitcoin at the same time, as the Swiss have done – that would send out a powerful signal that the British government welcomed cryptos and wanted them to flourish.
A wild ride awaits
There are, obviously enough, risks. Bitcoin and its rivals have been on a wild roller-coaster ride over the last year, with the price soaring to close on $20,000 a coin and then losing almost two-thirds of its value. Plenty of hucksters and hustlers have moved into the space, and there are a lot of dodgy get-rich-quick schemes. Investors need to be protected from them.
Underneath all of that, however, it is also increasingly obvious that there is a real industry and potentially an important one. Bitcoin may well have settled down now, at around $7,000 to $8,000 a coin, which could well be its natural price. Amazon and many dotcom shares were in a bubble two decades ago, but that didn’t mean there weren’t real businesses underneath the hype. The same is probably true of digital currencies as well. After the initial bubble, the hucksters move onto the next craze and the serious work begins.
With its history of financial innovation, London is the natural home for crypto-currency trading and start-ups. We have the depth of talent, the infrastructure and one of the world’s most trusted legal systems. It is crazy to let places such as Zug or Wyoming outsmart us. The British government should be passing legislation as soon as possible to compete – and before somewhere else beats us to it.