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To get a snapshot of the cryptocurrency market from an insider’s perspective, we sat down with Matt Smith, chief executive officer at compliance tech and data analytics firm SteelEye, to get his views on government involvement, regulation, and the potential for bitcoin and other tokens to become a recognised means of exchange.
Q Since the government announced it wants to make the UK a ‘global hub’ for crypto tech back in April, what developments have you seen?
Since the chancellor announced his intention to make the UK a “global hub for crypto assets technology” there have not actually been any major developments.
While it may signify the Government’s appetite to become an attractive place for cryptocurrency companies to operate, the lack of detail around the proposals – more specifically, around revolution and how it will protect the UK economy – is a gap that needs to be addressed.
Q How does this enthusiasm square with the lack of regulation and the Financial Conduct Authority’s strong and repeated warnings about crypto in general?
The initiative is being viewed at arms-length by the FCA, with chairman Charles Randell warning against rushed regulation.
As is the case with most international regulators, the FCA is still making sense of the decentralised market and how it operates. Unlike other financial markets, with crypto, there is no central oversight – jurisdictions are trying to regulate independently for something that is inherently global so there is no clear approach.
To date, much of the nascent digital asset regulation has focused on money laundering, anti-terrorism funding and know your customer provisions, and while viewed by many as a necessary first step, it has meant that many other important elements are not yet being adequately addressed.
For example, the FCA does not yet know if it wants to treat crypto as foreign exchange or commodities. The crypto industry would certainly want to be grouped in with FX, but regulators generally don’t want to give it that level of credibility, or at least not yet, at any rate.
In time, we will see regulation come into effect and, while there are arguments that a new definition is needed, given the parochial nature of regulators and the vested interests involved, the incentives are for each regulator to fit digital assets into frameworks with which they are comfortable, taken from existing financial legislation.
Q Will we see a thunderbolt of all-encompassing crypto regulation arrive out of the blue?
No. For crypto markets to be credible in a global, normalised economy, there is a need for regulation – you can’t have a financial market with no laws. However, there is no immediate urge from regulators to “rush” into regulating crypto.
The FCA has urged caution, and we know from past experience that rushing in without full understanding means regulation either fails or stifles the normal economic flow of markets.
Some of the more forward-thinking exchanges in North America and the US are self-regulating, to stop market manipulation and financial crime. Regulators have a lot to learn from them. By starting to impose regulation in steps, understanding and oversight will improve at each stage, which will in turn lead to more credibility in the market.
Q Does crypto effectively begin and end with bitcoin?
Absolutely not. Not only are there thousands of different cryptocurrencies, but this world goes beyond crypto itself. There are other digital asset classes and applications of this technology – just look at the explosion of NFTs.
We are now seeing financial institutions digitalising warranties, becoming custodians of digital assets on behalf of their clients, and that brings credibility to the market.
We can track the history of digital assets and currencies, meaning that these digital markets are not the dark world many people think they are.
Particularly as these markets become regulated, and as established financial institutions start to invest in how they hold digital assets, there will be much more clarity – it will no longer be viewed as the dark underbelly of the web, but as an increasingly credible part of the global economy.
Q Should investors buy the dip?
The market is currently extremely volatile. By nature, because with digital currencies there are no physical assets, there’s nothing underpinning the market.
Other markets have normalised drivers, and conversely the price of crypto can be driven by almost anything – macro-politics, geopolitics, macroeconomics, misinformation, real information.
In terms of whether investors should buy the dip or not – like with any investment, it depends on the investor’s risk profile and understanding of the market.
Q Should we be concerned about the environmental impact of crypto mining?
What we should be most concerned about is the environmental impact of our new digitalised world as a whole – it goes beyond digital currencies and crypto markets.
The more we exist online – shopping, dating, socialising, etc – the bigger the requirement for data storage, and because data mining and data centres all have a carbon impact, that impact is only going to increase.
Infrastructure providers need to think about how to optimise to be more environmentally friendly and how to utilise resources to tackle this growing problem – which absolutely applies to crypto too.
Q Will crypto ever be a widespread means of exchange rather than a speculative investment?
Only time will tell, but you certainly can’t force it. For example, in September, El Salvador became the first country to make bitcoin legal tender, pouring millions of dollars into creating and promoting the bitcoin infrastructure, but the experiment has been seen as huge failure with the country’s 2,300 bitcoins are now worth half what the government paid for them.
For cryptocurrencies to become accepted as mainstream, they need to become more credible, and this will only happen when they are regulated, and when global financial institutions are confident enough to transact without viewing them as an inherent risk to their business.
Q What will the crypto market look like in 12 months and in 5 years?
Within the next 12 months, we will see some minor evolution, but a year is not long enough to see any major change.
In the next five years, I will be disappointed if global regulators have not figured out how to credibly regulate these markets.
There are currently a huge number of currencies and platforms and, as the market matures and regulation starts to come into force, we’ll end up with a handful of platforms that become the winners in this race – the rest will simply become betting shops.
Cryptocurrency is unregulated in the UK. The UK regulator, the Financial Conduct Authority, has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.
