By Jonny Fry
Mark Carney, Governor of the Bank of England, addressed Bloomberg on The Future of Money and the contested topic of cryptocurrencies on 2nd March 2018. I am sharing my thoughts here on his comments.
With the birth of ICOs, a New Asset Class has been created and, with it, cryptocurrency cannot be limited to the definition of a currency, as the Governor of the Bank of England stated. Cryptocurrency within the framework of an ICO is not an equity, nor a bond, nor indeed a commodity (though it can now potentially share attributes of these traditional assets dependent on the nature and type of Token that is issued).
But ICOs are creating high-skilled jobs and generating taxes. Given London’s preeminent legal and financial services sector, it would be most welcome to get HMRC and the FCA to offer clear guidance so the collective industry can properly regulate cryptocurrencies.
The focus of the dialogue around cryptocurrencies to date has been on the issue of Tokens as a method of raising capital and questions about the integrity of the organizations behind them. However, we are already seeing established organizations issue tokens to create Digital Loyalty Schemes and cryptocurrencies are even being launched in this country by local authorities and central governments. In a recent announcement from Turkey’s former industry minister and deputy chair of the Nationalist Movement Party (MHP), Ahmet Kenan Tanrikulu recently stated:
“The world is advancing toward a new digital system. Turkey should create its own digital system and currency before it’s too late.”
Mark Carney did not mention these developments nor discuss the implications, yet he had previously stated he has been talking to many other central banks, and said cryptocurrencies could improve the way banks manage transactions, when talking to politicians only at the end of 2017.
Governor’s key points and my responses
- Cryptocurrencies have proven to be a poor store of value. Not so different from the US$ then, which, according to JP Morgan it has fallen in value by 81% since 1971.
- Cryptos have no intrinsic value. This is not true for asset-backed coins which are increasingly being issued.
- It is not clear if Cryptos will become a recognized medium of exchange. They already are! Look at the value of Bitcoin over the last 30 days: $249 billion… someone is using them.
- Capacity constraints: Visa can process 65k transactions per second, Bitcoin only 7 per second. Really? Hashgraph can process over 300,000 Transactions Per Second. Telegram is looking to do 1 million Transactions Per Second. Currently Telegram handles 70 billion messages a day and just announced an ICO to raise over $1,2 billion.
- Annual electricity consumption for Bitcoin is double what Scotland uses p.a. Sure, but the first iteration of any technology is not the best (from hardware to software to cloud services) but consider Delegate Proof of Stake, ie EOS, using much less electricity to power its blockchain
- Cryptos are unreliable and inefficient. How many bank robberies have happened to date in the UK or globally? Cryptos create a record where the transaction has come and gone – they generate their own audit trail – so they could turn out to be a good weapon against money laundering; something the banks spend millions trying to deter and get fined even more millions for when they get it wrong.
- Decentralized / P2P exchanges are growing but still centered around established financial systems and institutions. Yes. Cryptos need guidance and acceptance by the regulators so that we can have proper exchanges.
- The Bank of England is aware that there are retailers who accept Bitcoin but not aware of any business holding its accounts in Bitcoin. Well, maybe not yet, but ask Starbucks about their plans, or how about a German quoted company called Naga who raised 40 million Euros last year from 50,000 investors!
- Cryptos are not true currencies. So please would he mind saying what type of asset they are?
- The BoE’s Financial Policy Committee (FPC) is considering risks posed to UK financial stability. Mark Carney doesn’t believe Cryptos pose a threat given that it is small part of the system. Compared to the dot.com boom, when the stocks were worth 1/3 of GDP. Cryptos account for much less, it’s true. Global equities are worth approximately $72 trillion. Cryptos today about $500 billion.
- That said, authorities need to act and decide what to do and how to treat them. Yes, as they are becoming a threat to the banks that Mark Carney and his colleagues regulate.
- Different jurisdictions are taking different views, some even instigating outright bans. Mark Carney believes that a better path would be to regulate elements: “The time has come to hold the crypto ecosystem to the same account as the rest of the financial system.” Yes, true, like how to tax them, and what is their legal status?
- Bring some elements into regulatory sphere. So allow them to be a recognized asset and then we would see regulated funds allowed to invest in them. This would be safer for smaller investors as they would have a diversification of holdings as opposed to buying individual cryptos. Two out of three equity fund managers cannot beat the Index hence the rise in Index funds. Why will it be different for cryptocurrencies? Surely it is more responsible to allow diversified regulated funds as opposed to cumbersome hot and cold wallets with the public being exposed to unregulated intermediaries?
What is the Bank of England doing?
Currently only banks can hold electric central bank money, so is that why only 30% of UK high street clients at their high tech Incubator in London have a bank account with them? Carney states that the BoE is open-minded about central bank digital currencies (CBDC) but given current constraints (operational, technical etc.), a reliable CBDC is not currently achievable. But, Mark Carney has already admitted if they launched a BofE crypto there would be a massive run on UK banks. After all, why would anyone risk holding money in a bank that has limited capital protection when you can have your money backed by the country’s bank? It was his chief economist back in 2015 who was keen to get rid of cash and have a digital currency.
Carney went on to point out that the related costs of banking transfers has come down by 40% in recent years and are much better when compared with Bitcoin. But Bitcoin is like the Model T Ford; a pioneer. There are far more efficient ways to now transfer money at a fraction of the price. For example Ripple, which has been backed by 100 of the largest banks in the world, rose in value by over 36,000% last year and is now looking to replace SWIFT, the system that transfers billions a day between banks, as it is so expensive. Alternatively look at Cashaa slashing the cost of making payments overseas.
Jonny Fry – Twitter jonnyfry175
CEO www.teamblockchain.net
