Since the phenomenal rise of the credit default swap, popularly known in financial circles as the ‘derivative,’ the City of London has been at the forefront of global foreign exchange trading, with a daily forex market value of approximately $5.5 trillion.
The Square Mile has gained a fearsome reputation as the leader of global foreign exchange trading due to decades of dominating the forex trading market, but this bullishness has not extended into the rapidly-growing cryptocurrency trading space.
Despite many crypto-friendly policy and investment decisions around the world, such as plans by a Frankfurt stock exchange to launch bitcoin trading, and the Chicago Board Options Exchange (CBOE)’s launch of bitcoin futures trading, London has primarily chosen to keep its distance from bitcoin and other cryptocurrencies, but why?
London’s Crypto Criticisms
A globally recognized basket of currencies which have experienced dizzying rises and sharp drops in a relatively short period would seem to be a subject of keen financial interest to London’s financial establishments, but many factors have conspired to hold back the City’s interest. Speaking to FT recently, FIGC Market Standards Board chairman, Mark Yallop dismissed cryptocurrencies market for its lack of scale. He said, “Their overall size, even in aggregate, is so small that they are too small to be of relevance in wholesale markets.”
In keeping with this picture, the entire city seems to have adopted a wait-and-see strategy for the future of crypto, viewing it as too much risk for too little available reward with little or no solid underpinning to provide a measure of assurance.
This particular investment mindset looks to be one that can only change if bitcoin or one of its many competitors can achieve mainstream public adoption. As it stands, illustrated in the graph below, this may be quite some way off happening.
Bitcoin Transactions. Source: Blockchain.info
Speaking further, Yallop said, “UK market participants have been very cautious in engaging with them (cryptocurrencies) because of fears about their vulnerability to fraud, financial crime and other ‘conduct’ risk categories.”
Due in part to bitcoin‘s pseudo-anonymous nature and its reputation for potentially enabling private transactions, London’s forex traders have been very reluctant to enter the cryptocurrency trading market. There is a partially justified fear of in some way allowing illegal money movements or otherwise getting mixed up in illicit transactions involving everyone from Russian mafia organizations to bad state actors.
Of course, this does not mean that nobody in London trades crypto. Spread betting firms like Plus500 and IG Index enable cryptocurrency derivatives, but the catch is that market movement that users track for investment decisions are driven primarily by centers in Asia, principally China, South Korea, Japan, Hong Kong, Singapore and Taiwan. In the capital of global currency trading, one very significant category of forex trading is at the mercy of Asian market forces.
“Unusually Strict Regulation”
Self-regulation is only half of the story of why London is slow to warm up to crypto. The other half of the story is that government and banking institutions involved in London’s finance have very restrictive policies regarding cryptocurrency trading. As mentioned earlier, financial centers in Germany and the US are making headway toward mainstreaming cryptocurrencies, while Tokyo on its part enables the ecosystem by regulating crypto exchanges.
In London however, the story is very different. Speaking to FT, Max Boonen, formerly of Goldman Sachs, now CEO of B2c2 had this to say, “Banks have been unusually strict in dealings with crypto. 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 had issues with anti-money laundering and decided to be a lot more conservative.”
UK authorities and banking institutions tend to look at bitcoin and other cryptocurrencies with a sense of suspicion and a general lack of clear direction about how exactly to go about regulating it. The ongoing disruption of strategic coordination with Europe caused by Brexit negotiations probably does not help in creating a reliable and workable plan for cryptocurrency trading regulation in the UK.
The good news is that London may be waking up from this self-induced crypto summer. Speaking in March 2018, Bank of England governor Mark Carney indicated that future regulation of cryptocurrency would hold crypto exchanges to the same standards used by securities and equity trading. In his view, would address a critical loophole in present laws. To this end, a joint team of officials from the Treasury, BoE and the FCA is set to collaborate later this year on a document that lays out a blueprint for the financial industry to trade cryptocurrency assets safely and legally.
According to Oliver Robinson, a director of Markets Regulation at AIMA, London stands to offer a unique set of opportunities if Digital Assets trading is fully normalized in the UK. In his opinion, the same advantages provided by the City in conventional trading – a central time zone, a stable legal system and a skilled talent pool – will play a significant role in bringing London to the forefront of crypto asset trading.
Tabb Group analyst, Monica Summerville goes further. In her opinion, if London’s banks decide to engage with the cryptocurrency trading market, it would set off a chain reaction that would take the entire industry to a new level. She says, “There is a wall of institutional money just waiting for the right conditions — such as adequate technology and regulatory clarity — to enter the market’’.
Once London’s financial establishment makes a move into crypto, and institutional investors follow suit, the probability is that the City will become Europe’s undisputed center for digital asset trading, and will mount a challenge to Asia to become the global cryptocurrency center. However, this remains a considerable ask because according to the BoE in a statement to the UK Parliament on May 24, “There [is] little appetite on the part of banks to take direct exposure to the crypto-asset market in any significant way in the medium term.”