A day doesn’t pass in the financial press without an article discussing Bitcoin, or any other of the myriad of cryptocurrencies available to be invested in currently. Therefore, this new market creates a massive problem for the Government in terms of regulation and consumer protections. Cryptocurrencies are a libertarian’s dream, with Bitcoin’s rumoured founder, Satoshi Nakamoto, telling his daughter to open her own business ‘not under the Government’s thumb’, and meaning that payments and wealth is not dictated to by a government. As a government with alleged libertarian sympathies, this creates a regulatory and political nightmare between allowing citizens the freedom to invest in whatever they see fit and protecting those who are vulnerable to misinformation and addiction.
The big question with crypto from a policy makers perspective is what exactly cryptocurrencies are. Those who promote them heavily will have you believe they are an alternative to hard currencies and are the future of payments. However, it is unlikely that one day you will be able to pay for a bottle of pop in your local newsagents using crypto. Those sceptical to the idea of cryptocurrencies will tell you it is nothing more than a speculative asset with no real value behind it. This is the key to understanding any possible approach by government in understanding what consumers need to be protected against.
An approach set out by Economic Secretary to the Treasury, John Glen, in April, involves the building up of regulations to protect consumers, alongside promoting the use of Stablecoins, cryptocurrencies pegged to a certain commodity, currency or other financial instruments, as a means of payment within the UK. These are some of the most popular coins for crypto investors to invest in, as the peg should make them immune to the volatility that has plagued many coins, such as bitcoin recently. However, one of these, TerraUSD, which uses reserves and algorithms to maintain a constant pegging to the USD at a one-to-one parity, imploded in May, leading to a full crypto market crash, thus suggesting, like in currency markets, while the value of two items is pegged to each other, there is no guarantee that this is a long-term stable outcome. It later emerged that the reserves that were designed to maintain parity were instead being used to buy Bitcoin. While in the financial services sector, these people would be banned from being involved in stock trading for at least a few years, in crypto, they simply started another coin straight away, called Terra 2.0, which is not a Stablecoin.
While Stablecoins are not as stable as suggested by their creators, it is hard to see what use they really have as a payment either. What can one Stablecoin do that a pound coin in my pocket or my debit card saved on my phone can’t?
This brings us to the second viewpoint of cryptocurrencies, that they are nothing more than an asset bubble, backed by no real value, and at risk of large levels of volatility. The Guardian wrote after the latest crypto crash that ‘as with every cryptocurrency bust, thousands of investors who thought they had discovered a get-rich-quick scheme are now finding they have lost almost all their money’. While sceptics may accept this as a chance to stop the growth of cryptocurrency in the UK, this is the wrong approach for any government to take, as this idea of speculation is no different to purchasing stocks, which can crash at any time, or even sports gambling. What the difference here is, is that gambling and equity trading are much more established markets than the ones for cryptocurrency, and so the strong regulatory barriers that these industries have are not as strong in crypto, which is something the government should be improving.
Greater education on the risks of cryptocurrencies is essential too, as the average investor in crypto is usually of a different demographic than those of equities. The investors lean towards a predominantly younger and less experienced demographic, and so can be persuaded by a social media narrative of getting rich quick, without stopping to consider the risks of their investments. If anything, purchasing crypto can almost feel like putting a bet on from your phone, and so it is raising the question of minimum age limits, as well as being able to set limits on how much capital can be invested on crypto trading apps, in order to protect those who are vulnerable to making huge capital losses.
Despite these negatives, the Government should continue to promote the use of cryptocurrencies and the UK development of the crypto industry. This is to ensure that we continue to be the European leader in the Financial Technology Industry, whilst also taking measures to limit the dangers posed by cryptocurrencies through better regulation of those who are purchasing them. This guarantees that they are not persuaded to invest through misinformation on social media, whilst also taking steps to ensure that the most vulnerable in our society do not overstretch their finances. Within reason, an approach like for online betting is ideal, due to similar clienteles and dependence on mobile apps, as well as the unpredictability or volatility of the cryptocurrency markets, even when coins are pegged to hard currency.