by Philip Pilkington
Tuesday, 29
March 2022

Rishi Sunak’s plan to regulate crypto will fail

Governments need to worry about trust, not controlling innovation
by Philip Pilkington
The British government are worried about an increasingly anarchic monetary system Credit: Photo by Leon Neal/Getty Images

Chancellor Rishi Sunak will be rolling out plans to regulate cryptocurrency markets in the coming weeks, according to Treasury sources. The regulations will be focused on so-called ‘stablecoins’ — cryptocurrencies that aim to anchor their value to either other currencies, or to commodities like oil or gold.

When approaching all things crypto it always makes sense to strip things right back to basics. What are the key functions of money? There are two: money is a means of exchange and a store of value. Crypto has always sold itself as an innovation in both functions of money.

As a means of exchange, crypto offers anonymity that conventional currencies do not. As a store of value, crypto enthusiasts pointed to the limited supply of coins which they said would make it a more reliable store of value than fiat currencies, whose potential supply is infinite.

I have long been sceptical of the latter claim. Crypto, at least in its first iteration, was always more likely to become a highly volatile speculative asset than it was to become a stable store of value. But I have never doubted that blockchain technology offers users privacy. Crypto sceptics like myself simply assumed that standard currencies were private enough for any transactions that were not criminal.

The latter assumption can no longer hold, however. Our fiat currencies are diminishing in trustworthiness both internally and externally. Internally, the surveillance powers unleashed by the COVID-19 lockdowns, most famously in Canada, have made people paranoid. Externally, the freezing of Russia’s foreign exchange reserves and their exclusion from the SWIFT system have made foreign governments wary.

Money ultimately rests on trust in the money issuer. In the past that trust was based on whether the authorities would debase the coinage. Today that trust is based on whether the authorities will use the monetary system for ends that have nothing to do with allowing smooth economic transactions. The more the users of money see the authorities utilising the monetary system for other ends, the lower the trust in the money itself and the more likely they will turn to alternatives.

This brings us back full circle to Sunak’s announcement. While crypto regulations have been in the pipeline for a long time, it is surely no coincidence that the announcement comes after a week of speculation on Wall Street and even amongst top IMF officials that the US dollar might not be the world’s reserve currency for much longer. The British government clearly wants to make sure that monetary anarchy does not emerge.

But regulations are unlikely to do this. Just as Wall Street always innovates faster than the regulators can regulate, crypto technology will always run rings around the regulators. You cannot simply ban alternative moneys. That is not the way the economy works — either in the digital era or in the era of gold and silver coinage. To make the public use your money you must prop up trust in that money.

If the British government are concerned about potentially anarchic developments in the monetary system — and they should be — they must put more effort into convincing the public that normal payments systems are secure and private, and convincing foreigners that the monetary system will not be weaponised for political ends.

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Bernard Hill
Bernard Hill
5 months ago

Philip, your article is just plain wrong about the “privacy” of transacting parties being a key feature of cryptocurrency.
The innovative feature of the blockchain technology is that it removes the need for any trust between the transacting parties, as well as any adjacent ones. Privacy per se, is not part of the equation.
You’ve got that wrong, because of your assumption that “money ultimately rests on trust in the issuer”. That is correct for fiat currencies only, not Bitcoin, which has no issuer.
If blockchain involves any element of trust at all, then it is trust in mathematics.

Last edited 5 months ago by Bernard Hill
David Barnett
David Barnett
5 months ago
Reply to  Bernard Hill

You are exactly right. In fact, Bitcoin, which everyone has heard of, is not private at all. Every transaction is traceable (in principle). It is a distributed ledger with no single chokepoint that a powerful player (like a government) can use to effect confiscation and/or forgery (aka “quantitative easing”).
Both the confiscation and forgery issues have been made stark by recent events. This is also the reason not all “cryptos” are equal. Government issued cryptos will be just as fiat as (or worse than) the existing currencies and should be shunned like the plague.
Money “anarchy” is exactly what the world needs to save it from tyranny. Distributed ledger currency achieves this. Bitcoin is the front runner in this space. It is already “legal tender” in El Salvador (but its eventual wide acceptance will make legal sanction superfluous, and legal banning of no effect).

Justin Clark
Justin Clark
5 months ago

Matthew’s youtube channel is so helpful in respect of this (good) article – example here –

Jon Hawksley
Jon Hawksley
5 months ago

The commercialisation of crypto currencies is driven by brokers who want to be paid to be an intermediary. If you use a broker you introduce an additional trust factor. You will have an account with them and you have to trust what they do on your behalf, in exactly the same way as you do your bank. It is as open to fraud as any other financial transaction. Yes it should be regulated, if only to avoid the state having to support individuals who have blown their life savings.

Bernard Hill
Bernard Hill
5 months ago
Reply to  Jon Hawksley

…regulation of intermediaries is fine. What’s important though, is that crypto is not more heavily regulated in that respect, in the interests of preserving the remnants of fiat currency credibility.