Ex-chancellor Philip Hammond on why banks love blockchain, and where Truss went wrong

Ex-chancellor Philip Hammond on why banks love blockchain, and where Truss went wrong

On 27 October, Financial News sat down with former UK chancellor Philip Hammond for a live discussion on all things crypto and politics. Now an adviser with crypto custodian Copper, Lord Hammond reflected on why institutions are diving into the blockchain, what the future might hold, and why politicians need to step up their games.

Our conversation has been edited for clarity and brevity.

Why make the move into crypto?

During my term as chancellor, we were thinking very carefully about what the post-Brexit world was going to look like. It changes the way London can operate.

I have always felt the solution to this conundrum is that London, post-Brexit, has to become willing to take a little bit more risk, to be a leader in embracing new technologies, new products, new trading ideas, in order to ensure that we have something to offer, which keeps our partners in the EU still engaged with London — however much they might like to break away and do their own thing — and gives us some underpinning to the claim that London will remain a global financial centre.

The digitization of financial services is not just the trading of what we currently call cryptoassets, but the digitization of the whole financial services ecosystem over time.

How far along the development chain are institutions, and what are they using that technology for?

It’s early stages. Of course, you’ve got a bunch of financial institutions including banks, hedge funds, asset managers, and family offices who are offering the ability to trade crypto assets and to hold those crypto assets safely. That’s the core business today which generates the cash flows.

We’re also seeing some banks using blockchain-based systems to do settlements between them. For example, I was in New York a few weeks ago, and I was told that Goldman and JPMorgan use a blockchain-based system to settle bilateral overnight positions.

Has the crypto winter had an impact on what banks are looking to do?

I don’t think so. It’s actually rather helped to focus attention on the long-term underlying technology and the potential it has to first of all improve, and then ultimately perhaps revolutionize the way financial services works.

The general view across the non-retail facing part of the industry is that the shake-out has been beneficial, and that it has allowed the more serious players to focus on the future. It does allow the institutions and the infrastructure providers to start to think about this as a as a longer-term play; it’s reduced the noise coming from the retail market.

Is that an admission that there were too many sub-standard or sub-scale players in the market?

The providers are divided into two camps: those whose business model depends on pitching to retail investors, who tend to be pretty hostile to regulation in any form, and those who are in this for a longer-term play, who see the construction of a new architecture for financial services as the real prize here, and who very much want the space to be regulated.

We see others — the EU, the Swiss, for example — starting to move to regulate this space properly. And I’m a little disappointed that the UK is as far behind as it is, because I think the UK not only has the opportunity and the track record of being pretty good at exploiting regulatory opportunities, but post-Brexit we also have the burning platform that ought to give us the motive to get on and do this.

I hope that under the new government — we have Rishi Sunak, who was a champion of moving forward in this space as chancellor — I hope that with him as prime minister, we will seek the UK moving to become the recognized leader in this space.

Why haven’t we achieved that leadership yet?

I think our regulators are struggling with bandwidth. Post-Brexit, there was a tremendous burden on the regulators, and I think that did chew up a lot of a lot of time and attention.

Secondly, I think they’re struggling to recruit and retain people that really understand the environment and the blockchain infrastructure that underpins it.

Thirdly, there’s been a lot of distractions during this period, and politicians perhaps have not been as focused on setting out the rules for this environment as they might be.

Will it be politically tough to keep that high on the agenda, when you’ve got inflation and a cost-of-living crisis, Russia and Ukraine?

It’s part of the UK growth plan and should be presented that way. That growth plan has to have many, many strands to it.

The Liz Truss government had a single tool for growth: cutting taxes with borrowed money. That’s not going to happen. The government before that had an agenda around levelling up and doing fantastic trade deals with the US. That’s not going to happen.

So I think that the current government will have to set out a clear direction for doing growth the hard way. Getting the financial services environment right is a key part of that.

This is Britain’s single biggest economic sector. The future is important to the whole UK.

Do you think governments will each launch their own digital currency based on blockchain for legitimate trade and investments?

Different governments have different incentives here. Without naming any names, some governments are trying to use CBDCs essentially as a way of abolishing cash and being able to track all activity on the blockchain. You could envisage those governments wanting full government access to the blockchain.

Other governments are looking at it more as an enabler of commercial transactions, and perhaps are not yet decided whether CBDCs in themselves are necessary, or whether an appropriately regulated stablecoin regime will deliver the economic benefits of having such a currency without the central bank necessarily having to be directly involved in the issue.

Will growth and investor protection come into conflict when legislators and regulators are pulling in different directions?

There’s no reason at all why we shouldn’t instruct the regulator that in certain areas, one of the objectives that it has to deliver is a growing volume of business in that area.

The easiest thing for regulators will be to shut the business down altogether; there will never be a trade that goes wrong if you have no trades. But the UK’s regulatory regime, over many, many years, has shown itself to be very adept at creating well-regulated spaces that gets that balance right.

Have they done enough to leverage private sector experience?

I don’t think we’ve got a forum for harvesting that knowledge and information. I think that the only way we will create the bandwidth within the regulator quickly is to set up a regime for secondments from the private sector.

City firms are telling us they would love to build a crypto team but can’t really find anyone who knows what they’re talking about, or they’re incredibly expensive…

I think that is the way it is. There are two routes for the institutions: they can either try to build in-house, or they can take stakes in start-ups and try to nurture new capacity that way. Some banks are using both tactics.

READ Top grads flock to £100k crypto jobs instead of banking

I do think it’s really important for the future of this space that we now have full institutional engagement. It’s only a few years ago the big global banks were treating crypto as something to be kicked back into the gutter.

The serious players see it as a way to transition the the banking sector from the era of double-entry bookkeeping to the era of blockchain.

With IPOs and M&A subdued, will that give banks a kick up the backside?

I think blockchain-enabled trading and custody is, first of all, a better, a more efficient ledger keeping exercise for banks. It requires much smaller back office facility, and it allows capital to be used much, much more efficiently.

That’s the first win for the banks. But they can also see that as you move to on-chain activity, settled in more-or-less real time, there are huge new opportunities for new products and new marketplaces.

Even if we see a crypto spring, won’t banks just pull back when the recession hits?

The big institutions, of course, flex activity in response to short-term pressures and opportunities. But they’re they’re also pretty good at seeing long-term strategic trends and betting what are very small amounts of money for them.

US banks with the biggest programs in this space might be spending a billion dollars. It’s chicken feed; I don’t think they’re going to risk being left behind in such a potentially transformative technology.

Are we going to see you back on the benches fighting for this?

I’m in the House of Lords and I intend to stay there. But I certainly want to, as these debates go through parliament, be making the case for the UK to be a leader.

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To contact the author of this story with feedback or news, email Justin Cash

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