For my sins, I have been reading Future financial services regulatory regime for cryptoassets, 82 pages of prime Whitehall verbiage that was published recently, setting out HM Treasury’s plans to govern the clouds and hold back the tides.

It opens with the statutory ringing endorsement by Andrew Griffith, economic secretary to the Treasury. He reminds readers that the government’s “firm ambition is for the UK to be home to the most open, well-regulated and technologically advanced capital markets in the world” – which “means taking proactive steps to harness the opportunities of new financial technologies”. He further believes that “crypto technologies” can have a profound impact across financial services and that “by capitalising on the potential benefits offered by crypto we can strengthen our position as a world leader in fintech, unlock growth and boost innovation”. Cont’d p94, as they say in Private Eye.

Billed as a “consultation and call for evidence”, the document invites our views on these important matters. As a public-spirited columnist, it would be churlish to refuse the invitation. So here goes.

First, though, a general observation about the tone of the document, which sometimes reads as though it had been written by crypto enthusiasts trying to sound grown up. Thus the talk everywhere is of “benefits” (actual or potential) and of “opportunities” flowing from crypto technology. Nowhere, though, are these supposed upsides explicitly itemised. And while there are many references to “risks”, they are always seen in the context of downsides than can – and will – be “managed”.

Since it seems improbable that the massed bands of philosophy, politics and economics alumni in the Treasury would be so crass as to engage in such boosterism, I started digging to find its source. It is to be found in annex B of an earlier Treasury document, the “final report” of the Cryptoassets Taskforce. The authors of that report had “benefited from the contributions of stakeholders across the DLT [distributed ledger technology] and cryptoasset sector” – namely, more than “60 firms and other stakeholders”. Which, being translated, means 60 vested interests.

At the heart of the consultation document are two hard problems. The first is what to do about the trade in cryptoassets. The other is what to do about the DLT (AKA blockchain) technology that underpins much crypto activity.

So what’s a cryptoasset? The Treasury defines it as “a cryptographically secured digital representation of value or contractual rights that uses some type of DLT and can be transferred, stored or traded electronically”. Bitcoin and other cryptocurrencies are examples. So are NFTs (non-fungible tokens). The Treasury estimates that there are at least 2,000 of these in existence and trading in them has become a kind of wild west inhabited by libertarian nutters, scammers, tech enthusiasts and get-rich-quick operators who gather in packs to separate suckers from their life savings.

The only way to impose regulatory order on this free-for-all is to regulate the exchanges that enable the trading of crypto tokens and their conversion to fiat currency (that is, real money). The problem for HM Treasury is that it can only regulate exchanges that are based in its jurisdiction and most of them will, such as the spectacularly insolvent FTX, be based elsewhere.

The second problem facing would-be regulators of the crypto sector – what to do about DLT – seems, in principle, easier to solve. The technology enables the sharing and updating of records in a distributed and decentralised way. Participants can securely propose, validate and record updates to a synchronised ledger (a form of database) that is distributed across the participants. A blockchain is a particular kind of distributed ledger in which cryptography is used to identify and authenticate approved participants, confirm data records and facilitate consensus about whether a particular entry in the ledger is valid.

Basically, there are two kinds of blockchain – permissionless and permissioned. The one underpinning bitcoin is the former kind: anyone can participate in consensus-formation, provided they have the computing power to solve complex mathematical puzzles. They are built this way as a means of realising the libertarian dream of not having to trust any worldly institution to validate transactions. But that also implies that they are unregulated by design. And, of course, they heat the planet.

Permissioned blockchains, in contrast, restrict access to the ledger to known parties (banks, for example) who can update it. They are computationally more efficient and, in a way, are just a different kind of database. As such, they are relatively easy to regulate.

Two conclusions to the questions posed by the consultation paper emerge from this. The first is that regulation of trade in cryptoassets can only be done by regulating the exchanges in which they are bought and sold. The UK will have jurisdiction only over those exchanges that are based here. Ultimately, regulation will therefore be done by regions over which even HM Treasury has no control. This may be unpalatable to devout believers in British exceptionalism, “global Britain” and so on, but it’s the reality.

The second lesson is that permissionless blockchains can never be allowed within the financial services sector. And that’s fine because permissioned ones will do the job more efficiently and within the rule of law.

What I’ve been reading

Philosophically speaking
What If My Lessons in Existentialism Were in Bad Faith? is a lovely reflective — and reflexive — essay by Robert Zaretsky on the Psyche platform.

Talking point
A nice, acerbic blogpost by Cory Doctorow on his Pluralistic site is Google’s Chatbot Panic.

Action required
An open letter by 1,500 computer scientists, software engineers and technology experts on the need to regulate crypto is published on concerned.tech.


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