On October 27, Financial News sat down with former UK chancellor Philip Hammond for a live discussion about all things crypto and politics. Now an advisor with crypto custodian Copper, Lord Hammond describes why institutions are diving into blockchain, what the future holds, and why politicians need to up their game.
Our conversation has been edited for clarity and brevity.
Why move to crypto?
During my term as chancellor, we thought carefully about what the post-Brexit world would look like. It changed the way London could operate.
I definitely feel that the solution to this puzzle is that London, post-Brexit, should be willing to take fewer risks, be a leader in implementing new technologies, new products, new business ideas, in order to ensure that we have something to offer, which are always partners in The EU is still involved in London – But many of them may like to break away and do their own thing – and give us some underpinning of the claim that London will remain a global financial center.
The digitalization of financial services is not only the trading of what are now called cryptoassets, but the digitalization of the entire ecosystem of financial services over time.
How far down the institutional development chain is it, and what is the technology used for?
It is the early stages of school. Of course, you have many financial institutions including banks, hedge funds, asset managers, and family offices that offer the ability to trade crypto assets and hold them securely. It is the current core business that generates cash flow.
We also see some banks using blockchain-based systems to do settlements between them. For example, I was in New York a few weeks ago, and I was told that Goldman and JPMorgan are using a blockchain-based system to settle bilateral overnight positions.
Does the future of crypto have an impact on what banks want to do?
I don’t think so. It actually helps more to focus attention on the long-term underlying technology and the potential it must first all improve, and then finally it can also revolutionize the way financial services work.
The general view of the non-retail facing part of the industry is that the shake-out has been beneficial, and has allowed other players to seriously focus on the future. This allows institutions and infrastructure providers to start thinking about this as a long-term play; it reduces the noise from the retail market.
Is it recognized that there are many sub-standard or sub-scale players in the market?
Providers are divided into two camps: those whose business model depends on pitching to retail investors, who tend to be quite hostile to regulation in any form, and those who are in this to play again-term, who see the construction of a new architecture for services financial is a real gift here, and who really wants a place to organize.
We see others – the EU, Switzerland, for example – starting to move to manage this space properly. And I’m a little disappointed that the UK has come so far, because I think that the UK not only has the opportunity and a very good track record of exploiting regulatory opportunities, but after Brexit, we also have a burnout. a platform that should give us the motive to ask for and do this.
Hopefully in the new government – we have Rishi Sunak, who is a champion to advance in this space as chancellor – I hope that with him as prime minister, we will strive to make Britain a recognized leader in this space.
Why have you not been able to achieve this leadership?
I think our regulator is struggling with bandwidth. Post-Brexit, there is a huge burden on regulators, and I think it is eating up a lot of time and attention.
Second, I think they are struggling to recruit and retain people who understand the blockchain environment and infrastructure that supports it.
Third, there is a lot of noise during this period, and politicians may not focus on setting rules for this environment.
Will it be politically difficult to keep it high on the agenda, when you have inflation and the cost of living crisis, Russia and Ukraine?
It is part of the UK’s growth plan and should be presented that way. That growth plan should be many, many strands.
The Liz Truss government has one tool for growth: cutting taxes with borrowed money. That will never happen. The previous administration had an agenda of leveling up and doing a very good trade deal with the US. That will never happen.
So I think that the government now needs to set a clear direction to do growth the hard way. Getting the financial services environment right is an important part.
It is Britain’s largest economic sector. The future is important for all of the UK.
Do you think that the government will launch its own blockchain-based digital currency for legitimate trade and investment?
Different governments have different incentives here. Without naming it, some governments are trying to use it CBDCs essentially a way to eliminate cash and be able to track all activity on the blockchain. You can imagine a government that wants full government access to the blockchain.
Other governments see it more as a provider of commercial transactions, and may not yet have decided whether a CBDC in itself is necessary, or whether a properly regulated stablecoin regime would provide the economic benefits of having such a currency without a central bank having to have one. to get involved directly in the problem.
Will growth and investor protection come into conflict when legislators and regulators who pull in different directions?
There is no reason why we should not instruct the regulator that in certain areas, one of the objectives to be achieved is the growing volume of business in that area.
Answer: The easiest thing for the regulator will be to close the business down altogether; there will never be a wrong trade if you don’t have a trade. But the UK regulatory regime has, over the years, shown itself to be adept at creating a well-regulated space that strikes that balance.
Have they done enough to leverage their private sector experience?
I don’t think we’ve got a forum for harvesting knowledge and information. I think that the only way we will create bandwidth in the regulator quickly is to adjust the regime for secondments from the private sector.
City companies told me they would love to build a crypto team but can’t find anyone who knows what they’re talking about, or it’s too expensive…
I am that way. There are two routes for these institutions: they can try to build in-house, or they can take stock in the beginning and try to nurture new capacity that way. Some banks use this tactic.
I think it is very important for the future of this space that we now have full institutional engagement. Just a few years ago, big global banks saw crypto as something to be pulled back into the gutter.
Serious players see this as a way to transition the banking sector from the double-entry bookkeeping era to the blockchain era.
With IPOs and M&A subdued, will give the banks a kick up the rear?
I think trading and custody using blockchain is, first of all, a better and more efficient exercise to keep books for banks. This requires smaller back office facilities, and allows capital to be used more efficiently.
The first win for the banks. But they can also see that if you move to on-chain activities, which take place in real time more or less, there are huge new opportunities for new products and new markets.
Even if we see a crypto spring, won’t the banks back down during the recession?
Large institutions, of course, are flexible in their activities in response to short-term pressures and opportunities. But they are also pretty good at looking at long-term strategic trends and betting what is a very small amount of money for them.
US banks with the largest programs in this space are probably spending billions of dollars. It is chicken feed; I don’t think there will be any risk of being left behind in a technology that can transform it.
Are we going to see you back on the bench fighting for this?
I am in the House of Lords and I am going to stay there. But I would certainly like, as the debate goes through parliament, for the UK to take the lead.
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