Bank of England governor Mark Carney in a speech today at the inaugural Scottish Economics Conference at Edinburgh University has dismissed bitcoin as a failure, saying crypto must be “held to the same standards as the rest of the financial system” in a broad hint that stronger regulation is coming soon.
The key takeaways from the speech were:
- Crypto-assets do not pose risks to financial stability “at present”
- Bitcoin has failed as money
- Regulation of exchanges is coming
- The shielding of illicit activities “cannot be condoned”
- Bank of England is “open-minded” about distributed ledger technology
- It’s better to regulate crypto-assets than isolate them
- society preference is for “peer-to-peer interactions”
Bitcoin will fail to dislodge fiat
The bank chief begins the speech by looking at the current different forms of money and in which he includes crypto. Carney then runs through a brief history of money, using as his theoretical starting point and guide Adam Smith, referencing the trinity of store of value, means of payment and unit of account to define it. He says that ultimately “ money is a social convention.”
The history of the debasement of money led modern economies to settle on “centralised, public fiat money backed by robust institutions in order to provide the public with money that is both highly trusted and easy to use”, says Carney.
Carney says this “robust institutional framework” is being challenged by a competitor but the current legal tender in the UK “sets a very high bar for competing forms of money to dislodge sterling” but that “…at present, more than a thousand virtual or “crypto” currencies are trying to do just that”.
Then he comes to the second part of his speech headed “The advent of Cryptocurrencies” in which he highlights the gap between promise and reality, concluding that in as far as they are currencies “the short answer is they are failing”.
Volatility, scaling and transaction fees
The reasons for the apparent failure are familiar; “poor short-term stores of value; volatility “of the top ten… was more than 25 times that of the US equities market in 2017; and they have “neither intrinsic value nor any external backing”.
Carney says the fixed supply of Bitcoin far from being a plus is a huge negative because it “would impart a deflationary bias on the economy”. Bitcoin, if it were adopted widely holds the danger of “recreating a virtual global gold standard would be a criminal act of monetary amnesia”, in a reference to the abandonment of the gold standard in the 1930s and for international payments in the early 1970s.
The governor pulls out means of exchange as the main weakness of cryptocurrencies, highlighting the fact that “Visa can process up to 65,000 transactions per second globally against just 7 per second for bitcoin” and that those transacting in the bitcoin network “face queues of hours” and high fees. He also mentions that the networks annual electricity consumption is double that of Scotland.
Although Carney fails to mention the new generation of blockchains such as EOS and NEO and further down the line Cardano that have solved these scaling issues, he does go on to speak of crypto-assets as distinct from cryptocurrencies, recognising that the underlying blockchain technology has many uses beyond currency.
Regulate not isolate – puts exchanges and ICOs on notice
Carney asks whether the authorities should isolate, regulate or integrate crypto assets and comes down firmly on the side of regulation, seeing the isolation route as “foregoing potentially major opportunities.
“The time has come,” says Carney “ to hold the crypto-asset ecosystem to the same standards as the rest of the financial system.” He explicitly targets exchanges: “In my view, holding crypto-asset exchanges to the same rigorous standards as those that trade securities would address a major underlap in the regulatory approach.”
Further, using very definite language, he says that initial coin offerings “will not be allowed to use semantics to avoid securities law”.
Crypto-assets part of reorganisation of economy
After addressing regulation Carney sees the “core technology” meeting societies’ “changing preferences” for peer-to-peer interactions, and “bringing crypto-assets into the regulatory tent could potentially catalyse innovations to serve the public better”.
Significantly, Carney sees crypto-asset not just as here to stay but as integral to the reorganisation of the economy: “Crypto-assets are part of a broader reorganisation of the economy and society into a series of distributed peer-to-peer connections across powerful networks.”
He explicitly focuses on the benefits around managing data, improving resilience by “eliminating central points of failure”, enhancing transparency and auditability and expanding what he calls the use of “straight-through processes… including with ‘smart contracts’”.
Carney mentions that although the central bank is experimenting with a central bank digital currency (CBDC) it sees a clearer way through to improving payment systems and reducing costs by upgrading the banks existing systems, namely the RTGS (real-time gross settlement) and opening up the bank to bank Faster Payment System (FPS). Cross-border payments could be improved markedly by “synchronising national RTGS systems”.
He identifies securities settlement as an area ripe for the application of distributed ledger efficiencies.
Catalyst for innovation
The governor ends in positive mode on crypto, making the most positive statement by the head of any central bank. “Bringing crypto-assets onto a level regulatory playing field could also catalyse private innovation to create a more resilient, effective payments system.”
On balance then, Carney’s comments should be taken as an endorsement of the space but crypto’s initial use case as an alternative form of money will likely be its least successful incarnation. Carney, as we mentioned, left aside third-generation blockchains but he also didn’t take onboard the possibility of side-chain solutions such as the Lightning Network that could go some way to addressing Bitcoin’s scaling issues.
Companies in the crypto ecosystem were already expecting regulatory proposals to come out of the G20 meeting in Argentina this month. Carney makes it very clear that exchanges and other entities are right to expect just that. Discussing money laundering, terrorism et al, the governor says: “The Financial Stability Board (FSB) [of the Bank of England] will report to the G20 in Argentina later this month on the financial stability implications of crypto-assets.”
Regulation is a positive for crypto
Baroness Michelle Mone OBE co-founder of EQUI a cryptocurrency-based platform for investment in new, innovative technology companies welcomed Carney’s comments: “Cryptocurrency has millions of people invested in it and it’s not going away. Mark Carney says that the underlying technology has a place in the future of money. I believe that cryptocurrencies are the future – the first Bitcoin was mined only nine years ago and now the governor of the Bank of English has a speech dedicated to it, just imagine where we’ll be in another nine years!
“Mark Carney raises a very important point, that of regulation. The simple fact is we need it. Everybody who believes in cryptocurrencies agrees that we need regulation to move forwards, nobody wants this to be the wild west anymore. With regulation comes stability.”
The full text of Carney’s speech can be downloaded here.
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