According to its press release, on 8 June 2023 the UK’s Financial Conduct Authority announced, ‘tough new rules for marketing cryptoassets.’ The following day I attended a meeting of the Strategic Advisory Group meeting of PIMFA, the UK’s Personal Investment Management & Financial Advice Association, where Herbert Smiths gave a presentation on digital assets and the roles they might play in the future. These, then, are my brief comments on the issues surrounding the main forms of digital assets and their regulation.
Central Bank Digital Currencies
If the Bank of England and others want to create their own digital currencies and governments allow them, I have no objection in principle. Presumably, the institutions concerned won’t want to squander their reputations.
Tokenisation of Illiquid Assets
Whilst this occupied the least time in the discussion, this was the most interesting area. It would be useful if tokenisation could facilitate a liquid market in currently illiquid assets such as office blocks, hotels, retail units and apartment blocks. If tokenisation also reduces the cost of investment below that of property funds and REITs, so much the better. However, most of the costs involved in real estate investment will still apply. Also, if physical assets are tokenised, then all necessary protections must be in place for all concerned, including tenants and users. Who beneficially owns what asset should also be a matter of open public record, not anonymity. Criminals should also not be able to use tokenised ownership as an aid to money laundering. If real estate is to be tokenised then it must be possible to identify responsibilities and liabilities without difficulty, and to hold the relevant parties to account in a worst-case scenario such as Grenfell Tower and/or the numerous large concrete buildings that tend to collapse in Florida.
Non-Central Bank Supposed ‘Stable Coins’
I completely oppose the recognition of Non-Central Bank issued so-called ‘Stable Coins’ as investable assets. They are merely an attempt to make cryptocurrencies respectable. Supposed ‘stablecoins’ have already proven unstable, e.g., Luna:
Non-Stable Cryptocurrencies Such As Bitcoin
Definition of ‘shill’ (informal North American noun and verb)
An accomplice of a confidence trickster or swindler who poses as a genuine customer to entice or encourage others, e.g., “I used to be a shill in a Reno gambling club.”
To act or work as a shill, e.g., “your husband in the crowd could shill for you.”
Most if not all crypto buyers seem to become shills almost immediately upon buying into the fantasy. I shall not reiterate here all the reasons why Bitcoin et al are neither real assets, nor, for the most part, useful mediums of exchange. The information supporting those facts is known already. The FCA position that cryptos are more akin to gambling than investing is true but is also simplistic, foolish, and dangerous. Cryptos are not an honest form of gambling. Regulation ensures casino games are honest. Institutions such as the Jockey Club regulate individual sports, and law enforcement agencies such as the FBI in the US are active against frauds such as point-shaving in college basketball. With cryptos though, all bets are off. Everyone who holds crypto has an interest in talking their own book. Contrast this with genuine investments and honest betting. The law and stock exchange rules require companies to give an honest picture of their finances and prospects. If anyone shilled for a listed company the way they shill for Bitcoin, they would immediately find themselves in trouble. Opining that the Pound will fall in value won’t result in the Government of the Bank of England inciting a Twitter pile on. Likewise, opining one way or the other on the prospects of a horse. Anyone seriously talking down cryptos, though, at the very least invites abuse and their own character assassination such as I experienced when I launched a petition in 2021 to ban UK banks from facilitating crypto purchases.
Fraud and Money Laundering
As a member of the Yorkshire & Humber Fraud Forum, I have listened to presentations by serving and former senior police officers, prosecutors, and organised crime specialists, and have had private conversations with them afterwards. All have been frustrated, downcast, and often truly angry at crypto transactions facilitation by financial institutions. My position today, as in 2021, is that the FCA should prohibit UK financial institutions from purchasing cryptos for their own account or facilitating such purchases for others. I also believe the FCA should prohibit regulated adviser firms from advising on purchases of cryptos.
Reputation and the Halo Effect
Some reputable financial institutions have bought Bitcoin, and that is a pity. When mainstream firms buy crypto, they confer upon it the halo effect. Bitcoin’s shills seized on the Ruffer purchase immediately the news became public, with pitches approximating to “Now big reputable firms have given Bitcoin the green light, it’s going to the moon!” Ever since Bitcoin hit the headlines it’s been obvious that the major asset managers have wanted a slice of the pie. It brings to mind the old line attributed to Lenin, “When it comes time to hang the capitalists, they will vie with each other for the rope contract.” Asset managers buying cryptos arguably risk finding themselves in the same position as the likes of Jeffrey Picower and others who originally benefited by investing early and then disinvesting from Bernard Madoff’s fraud:
https://www.forbes.com/sites/chasewithorn/2021/04/14/the-investors-who-had-to-pay-back-billions-in-ill-gotten-gains-from-bernie-madoffs-ponzi-scheme/. If ever the US Justice Department pursues them as they did Picower et al, to repay others who have lost, they might find themselves having to repay large sums which they are in turn forced to recoup from their investors. Even if that does not happen though, did the large asset managers really consider the long-term implications for their reputations, and if so, how did they justify it to themselves?
Does It Matter?
Some say that whereas small retail investors need protecting from losing their savings, it doesn’t matter if rich people invest and lose large sums. Essentially, this is the argument made by hedge fund managers who limit their customer base to a small number of ultra-high net worth individuals subject to high minimum stakes, e.g., $10m. The argument goes that “the worst that can happen is that enormously rich people end up very slightly less rich.” I profoundly disagree that this argument applies to the buying of cryptocurrencies. Anyone driving demand that pumps the value of cryptos stands to benefit the criminals who are already holding substantial amounts of what would otherwise be worthless unbacked assets.
So long as there are mugs in the world…
Bitcoin and its imitators probably won’t disappear. There are enough powerful holders of crypto – whales – with a personal stake in keeping the show going. Periodically there will be surges in value, whereupon the whales will realise the real money profits in the fiat currency they profess to despise and mistrust. That profit taking will lead to a new trough. Then, when memories have faded, the shills will ramp up their propaganda again, and the cycle will repeat.
The London Capital & Finance (LCF) minibond swindle provided a classic example of how legislators and regulators buy off complainants at others’ expense. Faced with a public outcry, individual LCF victims lobbying MPs and pressure from journalists, the government and the FSCS conspired to justify FSCS payouts at the expense of adviser firms. They chose to ignore that LCF had never been authorised to give advice and stretched the definition of regulated advice to unreasonable and implausible limits. The FCA’s and FSCS’s behaviour in the LCF débâcle is a warning that if cryptocurrencies ever figure anywhere in financial services regulation, supposedly mis-sold crypto victims will be able to use a “heads I win, tails the FSCS pays compensation” regulatory arbitrage to gain risk-free returns.
Neil F Liversidge
West Riding Personal Financial Solutions Ltd,
West Riding House, 6-8 Commercial Street, Castleford, WF10 1DG.