In proposing to sell the government’s £5 billion hoard of Bitcoin – accumulated from confiscating the proceeds of crime – Rachel Reeves has earned some keen supporters. But the Chancellor should resist the temptation. It wouldn’t be an error quite on the scale of Gordon Brown’s sale of half of Britain’s gold reserves in 1999 – that occurred right at the bottom of a bear market in gold, while Bitcoin in recent weeks has been trading at record highs. Nevertheless, Reeves would be missing out on the opportunity to build a Strategic Crypto Reserve which could turn out to be many times more valuable in the future. By backing cryptocurrencies rather than disposing of them, she could help the City of London capture an important market and recover some of its long-lost pre-eminence in financial transactions.
While Reeves is contemplating cashing in her Bitcoin, the US is going in a very different direction. This month Congress established the GENIUS Act (Guiding and Establishing National Innovation for US Stable coins), which will regulate and encourage the use of ‘stable coins’ – cryptocurrencies backed by liquid assets such as dollars or short-dated Treasuries. The act will address many concerns about criminals’ use of cryptocurrencies by incorporating strong consumer and anti-money laundering provisions. It will mandate the reporting of any suspicious activity involving cryptocurrencies, and ensure that they are backed by low-risk investments such as the dollar, or government bonds. There is an expectation, too, that President Trump will sign an executive order to allow the pension plans of millions of Americans to hold cryptocurrencies.
The US approach towards cryptocurrencies is both liberating and reassuring for consumers. The Genius Act is a recognition of the massively-expanding crypto market – worth $5.7 billion globally last year – and an effort rightfully to bring it inside the regulatory tent for the first time, rather than to leave it at the mercy of private operators. It introduces safeguards which might prevent a future scandal along the lines of the discredited scheme operated by the now-jailed Sam Bankman-Fried. It introduces supervision to ensure that those trading stable coins retain adequate liquidity, and introduces a proper framework for dealing the currencies.
Many people remain deeply suspicious about cryptocurrencies and will balk at the idea of governments having anything to do with them. Yet they are not going to go away. There is a generational divide in attitudes towards cryptocurrencies. While many older people continue to see them as a scam, many younger people have a similar attitude towards fiat currencies – paper money issued by governments and central banks which is not backed by gold or any other valuable commodity. It is time to recognise that fiat currencies are not the only ones that can be used in commercial transactions, and there is a good reason to explore alternatives. Blockchain, the technology behind cryptocurrencies, is increasing the speed at which transactions can take place. As for the argument that Bitcoin is not a proper currency because of the volatility in price, this needs to be absorbed as a warning to investors. It should not be used as a reason to prevent holding it, say, in a pension fund.
Many corporations, too, once had reservations about cryptocurrencies yet have since been converted. Those who decline to be involved face losing out. Look at analytics company MicroStrategy, whose shares have increased fourfold over the past year as it has become the largest corporate holder of Bitcoin.
The choice for our own government lies between taking action to incorporate cryptocurrencies into mainstream finance – or to watch as the US and others take the initiative. We need to be part of cryptocurrency regulation just as we were part of the post World War II Bretton Woods agreement, which established a regime for creating exchange rate stability, and which also established the International Monetary Fund (IMF) and the dollar peg. Stable coins, in fact, are becoming a new dollar peg. One of the consequences of the GENIUS Act, if it is not followed by a similar move here, will be to boost the value of the dollar.
In her Mansion House speech, Rachel Reeves rightfully blamed excessive regulation for stifling growth. Yet as well as restricting and encumbering, well-designed regulations can free up markets and encourage growth. Reeves should be looking into a UK equivalent of the GENIUS Act. But in the meantime she should signal her intentions towards cryptocurrencies by retaining the government’s £5.4 billion of Bitcoin and have it managed by a City firm. If Reeves will not do this, it is very fertile ground for the Conservatives. Kemi Badenoch will be watching the GENIUS Act with great interest.
Fail to embrace cryptocurrency now, and Britain will once again have missed out on the chance to take a lead in an emerging industry. It is critical that the City of London should not lag behind major structural changes in the world or finance. Creating a proper platform in London for trading cryptocurrencies could be the beginning of the City’s revival.
