What does the future hold for cryptocurrencies?
October 31st marked Bitcoin’s tenth birthday. To celebrate, The House and investment platform eToro held a reception in Parliament to discuss the issues around cryptos and the blockchain technology that underpins them. Geoffrey Lyons reports.
Birthday parties are a lot more exciting when the guests receive presents. On Halloween, global multi-asset investment platform eToro celebrated Bitcoin’s tenth birthday in style by giving away about ฿2.05 (worth around £10,000), some of which was dispensed from an ATM in Finsbury Avenue Square (the machine was activated by singing “Happy Birthday”) and some handed out at a drinks reception in Parliament.
The reception, hosted in partnership with The House, included a Q&A with MPs on cryptoassets and the blockchain technology that underpins them – topics that can elude even those most keen to understand their emerging impact.
“When my wife asked me what this whole blockchain and Bitcoin thing was about, I said that it smells like the Internet but is just a whole lot bigger,” Iqbal V. Gandham, eToro’s UK managing director, told guests.
Gandham, who helped build some of the UK’s first Internet Service Providers in 1994, believes blockchain is developing much like the Internet did in its early days. “The easiest way for me to explain blockchain and Bitcoin is to compare it to the Internet,” he said. “When the Internet started, it was all about communication. It wasn’t about ecommerce, it wasn’t about online travel, and it wasn’t about shopping.”
“Right now blockchain is all about value,” Gandham added. “So whereas the first use case for the Internet was about communication, the first use case for blockchain is about money on the Internet. We don’t know where the other use cases for blockchain are going to be.”
Jonathan Reynolds, Shadow Economic Secretary to the Treasury, is looking closely at blockchain and thinks there’s a lot of public interest, but he doesn’t think Parliament is paying much attention.
“It hasn’t come up as something of a primary issue in political discussions, and that’s mainly because what tends to feed through to Parliament are issues that are having a substantial effect on a large number of constituencies, and we’re clearly not at that stage yet,” he said.
Reynolds is concerned about the volatility of cryptoassets, and doubts whether they will be suitable for retail investors any time soon. “The capacity to make payments with cryptos isn’t particularly large, so presumably people are investing in these as commodities rather than currencies,” he explained. “If you have that sort of extreme volatility, investors have to know that’s the risk they’re entering into.”
But Bitcoin is far less volatile than it once was, Gandham replied. “If you look at ten years ago, daily price movements were 100%, 200%, 300%,” he said. “Now it’s four and a half, five percent.” He adds that volatility must be understood as a matter of scale. Looking at the price of Bitcoin rather than the millions of “satoshi” – the smallest unit of the currency – “is a bit like looking at the price of a bar of gold rather than an ounce of gold.”
SNP blockchain spokesman and self-proclaimed crypto geek Martin Docherty-Hughes MP agrees with Reynolds that Parliament has some catching up to do. “There is limited knowledge in this Parliament at the moment,” he said, adding that awareness must begin by placing blockchain in a public policy context. “My primary obligation is to look at how distributed ledger technologies will have long-term benefits for the public,” he says. “The Scottish government is already moving forward with research on this.”
Reynolds said that if blockchain does come up as a major issue in Parliament any time soon, it may actually arise in the context of climate policy. “I find the energy consumption of crypto unfathomable,” he said, referring to the amount of electricity needed to digitally “mine” new coins. Reynolds cited a report published earlier this year by the Bank of England in which its chief, Mark Carney, estimated that current electricity costs to mine coins are “double the electricity consumption of Scotland.”
“I disagree on this point,” said Gandham. “This is a first generation product. Second and third generation blockchains are no longer using mining, and that’s where the energy consumption comes from. So I think the energy problem has largely been solved.”
Even so, these are the sort of negative perceptions that blockchain advocates must contend with if they’re expecting parliamentarians to embrace the new technology. Not everyone in Westminster is a fan. Earlier this year, for example, Shadow Home Secretary Diane Abbott told The House that Bitcoin was “a gigantic Ponzi scheme,” and that her party is looking closely at its use in funding terrorist activity.
“Look, just like any technology, cryptocurrencies can be exploited by criminals,” said David Carlisle, Head of Community at Elliptic, where he leads engagement with policymakers and other external stakeholders on cryptocurrency-related regulatory issues. “But a lot of the time the public’s characterisation of these risks are sensationalised and not very accurate.”
According to Gandham, one such over-sensationalised characterisation has been the claim that Bitcoin is a bubble. “At the peak of the Dot-com bubble, the market cap of all tech stocks was 30% of global GDP,” he said. “At the peak of Bitcoin’s so-called bubble, cryptoassets were less than one percent of global GDP, so I’d be surprised if you walk down the street and meet anyone affected by that.”
Another misconception is that cryptocurrencies like Bitcoin are completely anonymous. “It’s not true,” Carlisle said. “One of the things we do at Elliptic is create software that makes it possible to trace the flow of Bitcoins from illicit sources and support cryptocurrency exchanges in meeting compliance obligations.” He said that these are the sort of facts that policymakers should take into consideration before making policy decisions. “If we want to ensure that regulation is done right, a big part of that is having a very open and honest discussion about what the risks are and what they are not.”
But what would “regulation done right” look like? In September, the Treasury Select Committee published a major report warning that crypto-assets exist in an unregulated “Wild West industry” that leaves investors “facing numerous risks.” Gandham, who provided oral evidence to the committee in June, said he’d like to see regulation on what the industry calls the “on-ramp,” or the point at which fiat money is converted to cryptocurrency.
“When people purchase cryptoassets, we want them to have to go through the standard know-your-customer protocols and anti-money-laundering checks, just as you would if you buy any other asset class,” Gandham said. “So regulation will add an element of consumer protection that I think is really, really important.”
Gandham, usually keen to draw parallels between blockchain and the Internet, said that in the context of regulation, there’s a key difference. Regulators could afford to sit back in the early days of the Internet because it was all about communication. “If somebody sent the wrong email to the wrong address, no big deal,” he said. But at the moment the blockchain is about money, so regulators need to be “a little bit visionary.”
“They need to actually protect the consumers before blockchain has a large economic impact,” he said. “The technology is here to stay, so it’s time for the regulation to catch up.”