Crypto’s recent implosion shows the virtues of the UK approach

Spare a thought for Matt Hancock. When Britain's former health secretary is done dodging rats, snakes and cockroaches in the jungle, he'll find that his pet project is looking a bit flawed too.

Before opting for a ritual TV humiliation by the British public to maintain his profile, the now-former Conservative MP had been vocal about the importance of crypto to Britain and the global financial system.

His musings include such corkers as “Cryptocurrency began life looking like a boom-and-bust fad.” The market capitalization of global cryptocurrencies has more than halved to under $1 trillion since he wrote in January, having already fallen by a third from its peak of over $3 trillion a year ago.

Mainstream adoption of crypto should “shake the foundations of banking,” Hancock said. And while the UK should be the “natural place” to embrace and lead this change, our glorious fintech future has been hampered by “reactionary risk aversion among regulators”.

To be fair, Hancock has just read the room, or at least a room at 11 Downing Street. The Treasury set out its ambition for the UK to be a "global hub" for crypto in April, with the promise of a (as yet unseen) non-fungible Royal Mint token and the suggestion that regulators should do more and faster.

The response was slow, cautious, bureaucratic and crudely correct. The sudden collapse of the FTX exchange this week and the demise of the crypto exchange closest to an institutional heavyweight in Sam Bankman-Fried sheds a different light on regulators' alleged failure to open their arms to this market.

It's not clear what kind of liquidity crisis FTX suffered to force it into the arms of critic and rival Binance, what the wider impact might be, or whether this deal will actually happen. But it doesn't say well about crypto's move into the mainstream that its best-known member, who hobnobbed with celebrities, supported greater oversight of crypto and speculated about buying Goldman Sachs, saw his business implode within a week.

Nor does the potential mass consolidation of the crypto space under the umbrella of Binance – a company that the Financial Conduct Authority said last year “failed to be effectively supervised” and “failed to respond” to fundamental questions – imply that its assimilation into Main Street Finance is becoming easier. Binance has since committed to becoming compliant and reapplying for UK supervision.

The FCA, either by lazy coincidence or design, may feel somewhat vindicated. It has used its sole anti-money laundering powers to introduce a registration system for crypto companies. Celsius Network, the crypto lender, struggled to get accredited in the UK before moving to New Jersey in 2021 and collapsing the following year. The regulator followed up its warning about Binance in September with one about FTX, which had also tried to get a license here.

Explosions happening elsewhere can be seen as a win, but crypto's disregard for regulatory nuances or boundaries means UK consumers can still be hurt. The FCA has pushed for new restrictions on crypto advertising that has appeared in every subway car. Its main approach was to warn where unauthorized companies are targeting British consumers and emphasize that those engaging in cryptos risk losing everything. If anything, it could have screamed louder.

“It would be unfair to taint the entire industry about what is happening with FTX,” said one adviser. “There are exchanges that are much more sophisticated and have really thought about these types of issues.”

The sector has complained about painfully slow and tricky licensing, while regulators counter that many applications were an unapprovable mess. Similarly, the plan to bring so-called stablecoins into the regulatory system has been accompanied by regulatory rumors that no existing coins would meet the standards likely to be applied.

There are many cases where slow regulation leads to failure: Britain is suffering from revelations of hidden leverage in the pension system, a form of shadow banking risk and the dangerous appeal of perceived security that was never fully addressed after the financial crisis.

But in a climate where politicians are still considering convening powers to override regulators deemed too cautious or stuck in the mud, it's worth noting where the watchdogs appear to have done something right.

It's a jungle out there.

helen.thomas@ft.com
@helentbiz