Is the Bank of England divided over the future of crypto?

Two critical factors are currently interplaying for the future of cryptocurrency in the UK.

First is London’s reputation as a global financial centre. Bankers and politicians stand united in their determination to maintain this status quo.

Second is the general acceptance that despite the most recent crash, crypto, and more generally blockchain technology are here to stay.

These two forces are creating an interesting divergence of opinion between key figures at the Bank of England and Treasury.

Bank of England: divided opinion?

All parties concur that crypto is becoming a more mainstream economic proposition. Commissioned by the Gemini platform, The Global State of Crypto Report has found that 20% of UK adults now own at least some crypto. For context, only 5% invest with a Stocks and Shares ISA.

Of course, with more widespread adoption, comes more widespread problems. The Financial Conduct Authority received 6,372 reports of crypto scams in 2021, double 2020’s figure, and its chief intelligence, data and information officer, Jessica Rusu, has called it an ‘area of growing attention.’

And the Bank of England has repeatedly highlighted that the $2.1 trillion global crypto market could pose a risk to financial stability.

This was emphasised at a recent meeting of the public accounts committee by governor Andrew Bailey, who warned investors that ‘if you want to invest in these assets, okay, but be prepared to lose all your money.’

He further declared that ‘people may still want to buy them because they have extrinsic value … people value things for personal reasons. But they don’t have intrinsic value.’

The governor has proposed that AI tools could be used to create automatic controls on suspicious cryptos. Depending on an investor’s perspective, this could pose yet another regulatory threat, or increase crypto’s legitimacy.

Then at a Stop Scams conference, Bailey warned that while digital assets open up new possibilities for financial innovation, crypto is also ‘an opportunity for the downright criminal.’ Doubling down, he argued that ‘cryptocurrency is the new front line for scammers,’ and pointed out that ransom attackers ‘usually demand payment’ in crypto.

While the governor prefers to highlight the potential downsides, his perspective clashes sharply with deputy governor Jon Cunliffe, who likened the future survivors of the current crash to the ‘Amazons and eBays’ of tomorrow at the Point Zero Forum in Zurich.

Cunliffe argued that ‘the analogy for me is the dot-com boom when $5 trillion was wiped off values…a lot of companies went but the technology didn’t go away.’ He further enthused that ‘crypto technology and finance…has the possibility of huge efficiencies and changes in market structure.’

Central Bank Digital Currency?

In April 2021, the UK’s central bank launched a taskforce to investigate the potential to launch a UK CBDC. Cunliffe suggests a key question to resolve is whether to link private stablecoins to a central bank ledger, or whether the bank itself should ‘provide the base.’

In an October speech, the deputy governor noted that while crypto is a ‘financial stability concern,’ he argued that ‘we should not classify new approaches as dangerous simply because they are different. Innovation, technology, and new players can tackle longstanding frictions and inefficiencies and reduce barriers to entry. Throughout history, they have been key to driving improvement.’

Bailey has long declared his desire to regulate stablecoins in the same way as payments handled by banks. And he’s even announced that the bank would intervene to oversee collapsing stablecoins in the event the issuer reached ‘systemic scale fail.’ It’s not hard to see what could go wrong, especially given the recent collapse of TerraUSD.

But a Bank of England backed-stablecoin, with tight regulatory oversight, looks to be on the horizon. Of course, many crypto originalists will decry the project as the antithesis of the wider crypto project.

However, political support is likely to be strong. Chancellor Rishi Sunak wants the UK to become a ‘global hub’ for crypto-assets and has already confirmed he intends to recognise stablecoins as a valid form of currency.

The Treasury is also exploring ways to make the tax system more competitive to encourage further development of the crypto-asset market in the UK, with Sunak saying that by regulating effectively we can give them the confidence they need to think and invest long-term.’

The Treasury even plans to release official NFTs through the Royal Mint as ‘an emblem of the forward-looking approach the UK is determined to take,’ despite research from The Block showing NFT sales have dropped by 70% year-to-date.

And this divergence of opinion could set up a behind-the-scenes struggle for the future of crypto in the UK.