London remains wary of jumping on crypto bandwagon
Banks hold the key to whether the City ultimately embraces digital currencies
For a financial centre that still dominates the $5tn-a-day global foreign exchange market, London’s reluctance to embrace cryptocurrencies will ultimately prove a blessing, or a costly mistake.
It is a subject that has come into sharper focus as Asian financial centres such as Tokyo encourage the nascent market by regulating crypto exchanges, while prominent US futures exchanges, such as the CME Group and Cboe Global Markets, have tried to muscle in on bitcoin. About 8,000 delegates attended a recent crypto conference in New York.
The tentative approaches to cryptocurrencies by the world’s leading financial centres reflect the strident debate over whether the likes of bitcoin, Ethereum and Ripple should be embraced or shunned. Critics view crypto as a tool facilitating money laundering, with a level of volatility and a lack of fundamental underpinnings that disqualifies it as a reliable store of value. Proponents argue that cryptos are an alternative medium of exchange that will free people from a financial system run by commercial banks and regulators.
London has historically been at the forefront of creating and profiting from new financial products, including the development of eurodollar deposits in the 1960s, the free floating currency era of the 1970s and the explosive rise of derivatives that began with swaps in the 1980s.
But Mark Yallop, chairman of the FICC Market Standards Board, an industry standards-setting body, said the City of London felt it could wait to see how the crypto market evolves. “Their overall size, even in aggregate, is so small that they are too small to really be of relevance in wholesale markets.’’
“UK market participants have been very cautious in engaging with them because of fears about their vulnerability to fraud, financial crime and other ‘conduct’ risk categories,’’ he adds.
Alongside an unease among UK authorities on how to regulate digital assets, the strength of wholesale banking in London and the dominance of banks have proved less conducive to the development of a market that has proved popular with retail investors.
The inroads made by London have been led by publicly traded spread betting companies such as Plus500 and IG Index. These firms offer retail investors cryptocurrency derivatives, but many of these customers take their cue from news out of the more developed markets in Asia.
Growth and innovation in cryptocurrencies reside mainly in Asia, a region that hosts the biggest cryptocurrency exchanges as well as a source of the cheap electricity bitcoin miners need. In the US, the large proprietary trading firms such as Cumberland, an arm of Chicago-based DRW, have entered the market.
Oliver Robinson, a director of Markets Regulation at AIMA, a London hedge fund trade body, believes there are significant opportunities in creating an institutional UK digital assets industry.
“They stem from what the UK offers global capital markets more generally — a central timezone, a respected legislative and judicial system and a deep global talent pool,” he said.
However, the game changer for London would be if banks decided to embrace cryptos, a move that would open the door for institutional investors such as asset managers to follow.
Monica Summerville, analyst at Tabb Group, a capital market consultancy, said there was “a wall of institutional money just waiting for the right conditions — such as adequate technology and regulatory clarity — to enter the market’’.
So far, larger banks have resisted, with the exception of Barclays agreeing to open an account for Coinbase, a US digital wallet provider and owner of the GDAX exchange.
“Banks have been unusually strict in dealings with crypto,” said Max Boonen, a former Goldman Sachs trader and now chief executive of B2C2, a London cryptocurrency market maker. “It’s nearly impossible to open an account for crypto in the UK. The problem is that in the UK there is a perception that banks have issues with anti-money laundering and decided to be a lot more conservative.”
Mark Carney, governor of the Bank of England, said in March that holding crypto asset exchanges to the same standards as those that trade securities, such as equities, would address “a major underlap in the regulatory approach”.
A UK crypto task force, comprising the Treasury, BoE and the Financial Conduct Authority, is planning to lay out this summer initial thoughts on how the financial industry could manage the risks associated with handling cryptos.
While many in the City sit back and wait, others are not wasting time.
Cryptocurrencies – investing or gambling?
David Mercer, chief executive of London based LMAX, a trading venue, which recently began trading digital currencies, said he expected banks would come to the market in the next year. “London is very bank-driven and we see it as being a late adopter.”
LMAX is regulated by the FCA and hopes to attract institutional investors with technology accustomed to coping with up to 100,000 messages a second. That is far in excess of the capacity of some online exchanges that have struggled with demand in busy times, and puts it into competition with US rivals such as Coinbase, which are also upgrading their systems.
London does have another possible ace up its sleeve regarding the crypto industry in Europe by offering a mix of securities lending, cash management and trading services. “London is uniquely placed as people don’t do it in other countries in Europe,” said Mr Boonen of B2C2.
But, for now, that remains a mere ambition. In written evidence this week, the BoE told parliament “there was little appetite on the part of banks to take direct exposure to the crypto-asset market in any significant way in the medium term”.
It may take more persuasion — or pressure — from customers to change their minds.