Ready to regulate: Why crypto and the City need each other

The financial services sector is rife with inefficiency.

The global financial system moves trillions every day and serves billions of people in the process, yet legacy technology and siloed systems make change immensely slow, if not impossible.

The majority of core banking systems are over 30 years old, and almost half of financial intermediaries suffer economic crime – in other industries, that number is 37 per cent.

Read more: Are Initial Coin Offerings (ICOs) a viable investment option?

Blockchain is frequently touted as the technology that will shake the financial services industry out of this funk, providing a distributed ledger that can be used to record, store and transfer anything of value: money, bonds, equities, contracts, titles.

While it may not be a silver bullet, in instances where security and transparency are even more important than speed, blockchain will become invaluable. And the speed at which transactions can be completed on the blockchain (something that has historically hampered the technology) is improving all the time.

We are on the cusp of a blockchain-dominated world – one that stretches further than finance. Worth over half a trillion dollars, the market already equates to around 10 per cent of the $5 trillion in circulation across the globe.

Companies which build traceability systems for supply chains are coming towards the end of their proof of concept phase. The excitement around blockchain and cryptocurrencies is now filtering through to the talent pool, with the jobs market growing over 200 per cent last year.

Moreover, specific innovations on the blockchain are having a transformative effect. Initial coin offerings (ICOs), to take a conspicuous example, have transformed funding opportunities not just for new, crypto-based firms, but every single business in the world.

But ICOs also illustrate well what is currently wrong in the blockchain sector as a whole: unregulated, they are proving to be a wild west for investors.

Of the 902 ICOs launched in 2017, nearly half have failed.

According to EY, more than 10 per cent of the $3.7bn raised through these new forms of capital raise has been stolen.

Across the globe, government response has been varied and highly reactive. Last year, China placed a blanket ban on ICOs and exchanges; the US, Australia and Japan have put warning statements out, telling investors to “be careful”; Canada is taking a more productive sandbox approach.

Here in the UK, however, the Financial Conduct Authority is still determining if and what regulatory action needs to be taken.

We are now at a stage where financial regulators have gone beyond the usual careful and considered approach taken with new asset classes like P2P lending and equity crowdfunding. Their silence on the crypto industry is not protecting consumers or encouraging innovation: it is doing the opposite.

This cannot sit well with anyone in the City. London is the largest financial centre in the world, and its regulation sets the global standard.

If we stand by and allow a key technological development to remain unregulated – and therefore unlegitimised – we do not just lose our position; we run the risk of missing out on the enormous benefits blockchain technology will bring.

There are ways forward. The City can provide the expertise to give this sector credibility.

In the areas of anti-money laundering and compliance, in which I specialise, we do not need to reinvent the wheel – the UKs strong regime can be applied to this new sector. Indeed, all our customers are volunteering to run their blockchains through our compliance software and past our teams, because they want the legitimacy a sensible regulatory framework would engender.

Numerous firms across the Square Mile can share best practice from other financial products to assist the regulator and advance the crypto industry. We already have industry working groups; lets grow them and ensure we have the cross-industry collaboration we need to go further.

And now is the time for large corporates to stop running scared of blockchain, and embrace it. There are huge benefits to be had in creating new products that will give them advantage.

Last month, Goldman Sachs listed blockchain as a business risk, because clients and intermediaries are using and trading products on distributed ledger technology. And herein lies the chicken and egg question: how can an investment bank take seriously and participate in something that is unregulated?

That is why it is time to work with the regulator to ensure legitimisation is brought to this sector.

Then, rather than a risk, we will have opportunity.

Read more: Lagarde warns of blockchain disruption to clearing and settlement sectors

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CityAM

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