While Matt Hancock became a household name as Health Secretary during the coronavirus pandemic, his natural territory has long been in the realm of banking, finance and technology. He started his career in the family tech firm, before working as an economist for the Bank of England and an advisor to then-Shadow Chancellor George Osborne.
Entering parliament in 2010 in the aftermath of the financial crisis, Hancock recalled that “there was a big push to build a strong FinTech ecosystem.” This was coupled with “a huge drive to marry up the success of the City with new, disruptive technologies” – an agenda that Hancock was responsible for as a Minister covering the government’s digitalisation plans, and then as Secretary of State for Digital, Culture, Media and Sport.
Having left the government last year, he is now promoting a number of causes: campaigning around issues related to dyslexia identification, pushing for his West Suffolk constituency to benefit from the government’s “levelling up” agenda, and advocating what he calls a “liberal, progressive approach” to FinTech and cryptocurrencies. As crypto becomes more mainstream, Hancock believes there is “now a massive opportunity” for Britain to emerge as a hub for decentralised finance. However, with many politicians being instinctively wary of this shift, he is concerned that “worrying trends in politics have emerged” – and has therefore decided to position himself as Parliament’s crypto champion.
Informing the Public
It is certainly true that many policymakers have expressed reservations about the rise of crypto. For example, Baroness Morgan, a member of the House of Lords and former Chair of the Treasury Select Committee, told DisruptionBanking that she believes cryptoassets pose an unacceptably high risk. In her opinion, public agencies like the Financial Conduct Authority (FCA) should run “public education campaigns to discourage consumers very strongly [from investing in crypto] and make it clear that they do so entirely at their own risk.”
Hancock believes that the key to assuaging such concerns is on-shoring as many cryptoexchanges as possible, so that they can be regulated by UK authorities. He pointed out that the companies themselves could benefit from the conditions offered by the UK market, but that the government could do more to make it more attractive still: “there’s a big set of advantages that come from operating out of the UK, [such as] the strength of the English legal system and the proximity to the international financial capital of the world in London. A high-quality regulatory regime will enhance trust in that system.” However, to “overdo” regulation would be a mistake as “these platforms can be developed anywhere,” outside the jurisdiction of British regulators.
While he accepts that consumers should be well-educated about the risks surrounding crypto products – and he called for the Advertising Standards Authority (ASA) to ensure that adverts are “fair and reasonable” – Hancock was keen to emphasise individual responsibility. He believes it would be “patronising” for the government to “tell some people that they can’t invest in risky assets.” In his view, the role of the authorities should be limited to informing “people about what the risks are, and [advising that you] shouldn’t invest more in a high-risk asset than you can afford to lose.”
Rather aptly for an alumnus of Threadneedle Street, Hancock summed up his outlook by citing the traditional motto of the City: “the old Latin phrase “Caveat Emptor” [let the buyer beware] has been the watchword of the success of the City of London for many centuries. And that’s the approach that we should take.”
The truth about volatility
Amongst crypto-sceptics, one of the arguments frequently cited in favour of increased governmental oversight is extreme volatility. The Governor of the Bank of England, Andrew Bailey, said last year that “substantial” fluctuations in value mean cryptocurrencies are not “a good medium for making payments.” He also warned consumers that they should be prepared to lose all their money when investing in crypto.
Hancock suggested that it is “naïve” to believe investors are not aware of these risks. “People who are looking to invest in cryptocurrencies know that the value goes down as well as up,” he said. In any case, Hancock argued that the debate around volatility has been skewed. At least as far as regulators and policymakers are concerned, it is not inherently a bad thing – and may even be irrelevant. Indeed, Hancock takes the view that worrying about volatility and valuations “is definitely not a matter for me [as an MP].” Authorities should not “say anything about the valuation of an individual coin […] in the same way that if you invest in a start-up, it’s not for the FCA to tell you which one might work out and which one might go bust.”
“My point is that we shouldn’t be afraid of volatility,” Hancock argued. “That’s the split between policymakers and investors. Likewise, valuations in FinTech – that’s a matter for people who are running, buying or selling FinTech businesses.”
As a policymaker himself, Hancock is firmly on one side of “the split.” He views his responsibility not in monitoring or controlling crypto price movements, but in making sure the conditions are right for innovation to flourish. In other words, Hancock believes governments are there to sort out the practical things: to ensure “that there is access to finance and that there’s a strong ecosystem; that we have the skills, the regulatory structures, the openness and the transparency that’s needed for growth.” Everything else – including the way in which markets move – is for investors to worry about. For him, “the idea that when something goes down in value, it is therefore automatically a bad thing, leads to bad policy.” Cathie Wood might agree:
Fundamentally, Hancock suggested that his stance on the crypto issue stems from a kind of Thatcherite belief in the inherent goodness of markets and economic freedom – whether exercising that freedom leads to profit or loss. He argued that the forces pushing back on developments in DeFi demonstrate that “we need to constantly remake and win the argument for free markets,” and that societal progress depends on entrepreneurs embracing volatility and “taking risks.”
It is perhaps because of this libertarian approach that Hancock is “not particularly excited” about the prospect of a Central Bank Digital Currency (CBDC) in the UK – a project the Chancellor, Rishi Sunak, has dubbed “Britcoin.”
Partly this lack of enthusiasm is for practical reasons: he fails to see an obvious use-case. After all, “in the UK, we have a brilliant domestic payment system – it’s one of the most efficient and cost-effective in the world. Most payments people make these days are free, and for vendors they’re increasingly free as well. With CBDCs, you’re essentially saying that the Bank of England should become a retail bank for all of us – and there’s a lot of problems with that proposal.” Because of this, CBDCs make more sense for countries like the United States, which “don’t have a good domestic payment system.” Or those, like China, which want a CBDC for strategic geopolitical reasons, namely “to try and displace the dollar as the international unit of account.”
But Hancock is also lukewarm for more ideological reasons. While many policymakers view CBDCs as a way for the state to oversee and regulate cryptocurrencies – in effect to centralise the decentralised – Hancock actively welcomes this lack of state control. “One of the most exciting things about cryptocurrencies – whether they’re stablecoins or untethered – is that it’s a decentralised payment system,” he said.
“Getting central banks [involved] is not what this was invented for: this is about democratising finance and decentralising things. So all those reasons mean that I’m less excited about CBDCs than I am about some of crypto’s other use-cases.”
Crypto has also attracted the attention of the authorities because of the perception that decentralised markets can facilitate financial crime. The Bank of England’s Deputy Governor for Financial Stability, Jon Cunliffe, recently called for “urgent” crypto regulation to ensure market integrity and combat financial malpractice. Hancock, on the other hand, has argued in the House of Commons that the increased use of crypto could help cut offences such as money laundering. This, he argues, is because of the improved transparency offered by blockchain-based coins.
Hancock accepts that this issue “demonstrates that there is an important role for the state here,” as is indeed true for all forms of finance: “the tackling of money laundering, for example, has long been part of regulating the financial system and tackling financial crime is incredibly important.” For Hancock, though, it does not necessarily follow that more laws, or crypto-specific regulation, are required. While “laws constantly have to be updated for new technology,” crimes committed on the blockchain will almost always be “covered by existing laws and existing criminal procedures.”
According to Hancock, policymakers are at risk of overreacting. There is a danger that MPs will focus overwhelmingly on the tiny minority of illicit crypto transactions, and therefore create a regulatory framework that stifles innovation and productivity in a rapidly growing space. What is worse, Hancock believes, is that this would come with no discernible benefits. He takes the view that “these technologies exist and they’re going to continue to exist – whether we like it or not […] So we should engage – and, yes, try to tackle money laundering but not in a way that means the technology is simply operated elsewhere.”
The overarching message Hancock was keen to express was that “technology is at the cusp of disrupting banking, in the same radical way that retail has been disrupted by online shopping or that music has been disrupted by streaming.” The extent to which the financial world has already been digitised is significant, and arguably started with “the disruption of the classic high-street bank model.” However, the widespread use of digital technologies “within the existing market structure” could be much more profound.
Most significantly, Hancock believes that crypto is disrupting the ancient relationship between currencies “as a means of payment” and “as a store of value.” Crypto threatens to challenge that model because these two functions are being “disaggregated.”
“Since the money halls of ancient Jerusalem, payments and value have been wrapped up together within the banking system. But now you can have payment methods that are separate from stores of value. That is the change that we’re at the cusp of, and we’ve got to understand the depth of the disruption,” Hancock argued. He went on to outline how he sees the role of policymakers such as himself: not to resist this “huge structural change in finance” – which would be both futile and self-defeating – but “to make sure that it’s managed in such a way that protects financial stability and allows democratic access to it.”
As the interview came to an end, Hancock predicted that “financial institutions that don’t engage with this topic are asking for the chop.” Incumbent banks simply must adapt business models and embrace new technologies, as well as changing consumer demands, if they wish to survive. “The ones that haven’t changed have withered on the vine – that’s been the case with the advent of new technology throughout the ages.”
Perhaps what is true of banks is also true of countries. Those which can grasp the scale of the change we are experiencing, and embrace the technologies that are revolutionising the way global finance operates, will prosper. Those that don’t will get left behind. Of course, whether Hancock is right in his predictions, and whether his proposed measures are the right ones, remain to be seen. But what is certain is that more politicians should be examining the disruption that is happening right now in global finance – and trying to work out the best way forward.
Author: Harry Clynch
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