There are multiple reasons cited for increased regulation in crypto, the most common of which are investor protection, institutional adoption, and safety. While regulations can be seen as a good thing in general for the space they’re by no means a universal panacea. Examining what central banks want regulation to look like gives a clearer indication of who benefits most from them.
In December Sir Jon Cunliffe, Deputy Governor of the Bank of England said, “We would need to regulate to ensure that we get the same level of protection, the same level of resilience as we would have normally. Now before the crypto winter of last year and the FTX implosion this year I think a number of established financial players, investment funds, banks, were thinking of getting involved.”
Adding, “Offering services, custody, market making, and the like and we need to make sure that if that is to happen then the standards are correct. I don’t think it’s going to be possible to say that this can be kept outside of the financial system. It’s too dangerous.”
His views make it clear that regulation is about bringing crypto inside the current financial system for the benefit of major institutions, not the general public. ‘Bringing it inside’ means placing crypto under the control of the present financial system, which is governed by central banks.
The idea of crypto being regulated by central banks is anathema to many within the space. Already Christine Lagarde, head of the European Central Bank has said that she wants cryptocurrencies to be dependent upon the private banking sector by outlawing self-custody and peer-to-peer transactions.
Sir Jon went on to explain the reason for seeking to impose regulations now is because crypto was being adopted by institutions. He said, “It was starting to develop links with the financial system. We had banks and investment funds and others who wanted to invest in it, and I think we should think about regulation before it becomes integrated with the financial system.”
He also admits another reason for regulation is because the banking system wants to use the technology for itself, “There are technologies here which could, and I stress could be of use, of real use in the normal financial system. More efficient ways of doing things, potentially more resilient ways of doing things. That hasn’t been proven in the crypto world, but if we can provide a regulatory space where people can see if they can develop products using this we might be able to get the benefit of some of those technologies.”
This statement will come as a surprise to many in crypto because there are already several examples of successful protocols and financial products in the space. Not only has the technology been proven in crypto but it’s also being used by some banks already.
Speaking with a senior manager of a major bank in Turkey they described one such instance. Qatar National Bank (QNB) currently uses a private blockchain provided by Ripple to transfer funds to and from their bank in Turkey.
They explained, “Funds travel back and forth on RippleNet quickly and efficiently. When compared to Swift it’s light years ahead. One colleague recently transferred funds through Swift. They disappeared in the system for days, eventually being returned to them as a failed transaction because one of the intermediaries rejected it. On the Ripple system, it takes minutes and never fails.”
It may be that central banks are using regulation as a way of slowing the development of the space to give them more time to control it. This certainly appears to be the case with stablecoins as Sir Jon explains, “There’s a bill going through Parliament now that will give the Bank of England powers to regulate stablecoins when they’re used to make payments. We’re developing a regulated regime there.”
The reason they want a regulated regime for stablecoins is that the Bank of England is presently developing its own stablecoin. In general, all Central Banks are opposed to independent stablecoins because they fear capital flight from their economies. For instance, if everyone started to use Tether instead of US Dollars to settle trades it would reduce the US Government’s ability to control the global financial system. This is also the reason China banned cryptocurrencies and introduced its own CBDC.
Despite the advances in blockchain technology being revolutionary for the current financial system, Sir Jon frequently criticizes cryptocurrencies as being of no value. He said, “Do they have a future as a safer form of money than that produced by central banks and the financial system? No, I don’t think so. The opposite.”
There’s a clear mismatch between the words of central bankers who describe cryptocurrency as highly speculative and backed by nothing, yet seeking to commandeer the technology it’s built on. There’s also a discrepancy between this attitude and major players, such as Morgan Stanley, BlackRock, and Goldman Sachs who are pumping billions into crypto.
If central bankers get to decide the regulations for crypto it’s certain that we’ll get the worst possible outcome for the space. Although they will claim to have retail investors’ welfare at the forefront of their minds, they will instead be focused on bringing the most benefit to themselves, private banks, and large-scale institutions.