Why London could write crypto’s next chapter
London’s Tech Week is always a opportunity to assess the strengths of the capital’s tech push.
Prime Minister Sunak has made all the right noises in recent months about the UK’s need to focus on future technologies. His speech to kick off Tech Week specifically focused on how London could become the global home of artificial intelligence regulation.
More encouragement for Sunak came when a16z announced it had chosen to open its “crypto hub” in London. But what does the a16z news mean for crypto and London? Might it find a welcoming home in the world’s hub for the traditional capital markets?
Open for investment
As the linked TechCrunch piece above highlights, the US and the SEC have definitely made their position known on crypto. With high-profile suits being filed against Coinbase and Binance, but investors still looking to go big on crypto and web3, there looks to be a massive opportunity for the city or country that offers investors a home for their capital beyond US borders.
We have always had a slightly skeptical house view of crypto (or at least the craziest elements of it), but I’ve always believed that it’s too early to write it off. The a16z development is proof why London might be well-positioned to capitalise on its unique potential. PM Sunak and the Conservatives will benefit too if they manage to come across as progressive and ‘open for investment’ to a vast amount of global capital.
Financial history repeating
In an analogous way, this is reflective of what the UK has been doing in the traditional capital markets over the past 40 years, a time during which it has punched well above its weight. To state the obvious, the UK isn’t the US, and it really shouldn’t try to be – I spent 22 years in one and 15 and counting in the other, so I feel like I can say that with some confidence!
The US has a large, homogenous, advanced, domestic market, and its financial and capital markets, and the associated regulation etc, can grow and evolve entirely within its own borders and be more than successful. The US bond market has grown in such a way and is unique, has its own regulations (Rule 144A anyone?) and there’s no reason any of its stakeholders need it to change, because the market it serves is large enough to feed everyone.
On this side of the pond, the UK is nowhere near as big. The population is 20% of the US’. GDP is a mere 13%. If we only looked at the domestic UK financial market we’d be looking at a very small market!
However, the UK’s success over the past 40-50 years has been in positioning itself as the “international centre” for the “international markets.” People needed to trade dollars offshore, and London provided a regulatorily safe, simple, place to do so. Eventually, as a result of this ‘come one, come all attitude,” it captured the ”international” financial market.
This abstract from this paper from the BIS has a good summary which neatly sums up the point:
“The Eurocurrency market is arguably the most dramatic financial innovation in the post-war period yet very little is known about its origins. This paper examines two facets of the Eurodollar market: why it happened and why London kept most of the business. Using archival evidence, this article reveals that Eurodollars were accumulated earlier than has hitherto been thought. This has important implications for how we interpret the factors prompting the innovation. High interest rates, self-regulation by banks, and changes in access to the forward exchange market combined in mid-1955 to encourage innovation by the Midland Bank. The major source of competitive advantage for London was the regulatory environment which combined tight money in the domestic economy with relative freedom in international finance.”
Crypto inbound
Whether the UK and London can do the same for crypto remains to be seen.
In fact, a central question remains whether the crypto markets can emerge to be as meaningful to the global economy as the traditional capital markets. This is up in the air, especially in light of the savage sell off in markets and the severe erosion of trust in the system over the past 18 months.
But, even despite Brexit, we must remember how the UK has a long history as an international legal and financial hub, and providing a safe place for international entities to come together, leading to success that has far outweighed its size. When it comes to crypto right now, stringent regulation, careful custody, the ability to access world class operational support etc are components needed to rebuild the use case and value proposition. London is uniquely positioned to deliver.
A brighter future
In the financial press of late, there’s been a lot of UK bashing. Without getting too political, some of it has been right on the money given a lot of what has gone on over the last few years.
But the trans-Atlantic move by a16z, which is without question a very large stamp of approval from a hugely respected firm, may show that a lot of the criticism has been hyperbole, and that London’s rich financial history might be what allows it to take advantage of crypto’s future.
