Crypto Firms Get UK Government Support Despite Crash

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Technology venture capital firm Andreessen Horowitz, or a16z, announced on June 11 that it would open an office in the UK. British Prime Minister Rishi Sunak provided a quote for the announcement, proclaiming a bright new blockchain-based future for Britain.

Technology venture capital firm Andreessen Horowitz, or a16z, announced on June 11 that it would open an office in the UK. British Prime Minister Rishi Sunak provided a quote for the announcement, proclaiming a bright new blockchain-based future for Britain.

This may seem odd given the current state of the cryptocurrency market, which crumbled a year ago into a mess of incompetence and fraud. Enthusiasm for crypto was all the rage among politicians such as Salvadoran President Nayib Bukele and Miami Mayor Francis Suarez as the bubble swelled. Getting into crypto now, however, is like buying Theranos shares after Elizabeth Holmes was exposed.

The Terra-Luna crash of May 2022 burst the crypto bubble of 2021. Prices crashed across the board, but, more importantly, trading volume crashed as retail investors took the plunge. leak and the inflows of scarce real money into the crypto-economy were drying up. Terra-Luna axed investment programs Celsius and Voyager, crypto hedge fund Three Arrows Capital, and numerous smaller companies in the second half of 2022. Sam Bankman-Frieds FTX, a hollow shell since last May, finally fell into November 2022. Silvergate Bank and Signature Bank, both overloaded with unstable deposits from crypto firms, collapsed in March, sparking a banking crisis that was barely averted by US regulators.

In early June, the U.S. Securities and Exchange Commission sued Coinbase, the largest U.S. dollar crypto exchange, and Binance, the world’s largest crypto exchange, both alleging that their exchange operations violated laws. on securities. Both companies are treating the charges as a matter of life and death for their US businesses.

Coinbases explicitly hopes that Congress will write new special enabling laws just for this. But that is unlikely as crypto is perceived by the public, and therefore politicians, to be synonymous with fraud. Cryptos best lobbying efforts were filtered through Bankman-Frieds Washington operations; with FTX out of the picture, even once friendly politicians don’t want to stay with the bag.

This means that the crypto industry’s main hope is to look outside the US market. Coinbase is currently setting up a small operation in Bermuda. The European Union recently adopted the Regulation of Crypto Asset Markets (MiCA), which will come into force in 2024.

This is perhaps where the UK, especially under an increasingly desperate Sunak, comes in. The UK has not harmonized with the EU on MiCA and is actively disharmonizing various other regulations financial.

The problem for Sunak and his Conservative government is that the UK is not doing well. Britain’s economy has suffered severe damage from Brexit, but pulling out of Brexit would alienate the Conservative base. Rampant inflation outpaced wages, leading to widespread industrial unrest. Inequality is rising: The Trussell Trust, the UK’s largest food bank organizer, reported in April that more than 760,000 people had used a food bank for the first time last year.

The opposition Labor Party has consistently been 10-20 points ahead of the Conservatives since the start of 2022, even without a clear policy. Culture wars and chauvinism are not turning the tide for conservatives. They are desperate for something, anything, in time for the 2024 election. They know they need a miracle.

Since the crypto crash, a16z has attempted to enter the various technologies currently marketed as artificial intelligence, although investment in AI companies only pays off on the one-year seed cycle. Sunak also seized on AI as a possible solution to his problems, including portraying the UK as the geographical seat of global AI security regulations, ignoring the EU’s Artificial Intelligence Act. currently underway, which is much more likely to set the global tone.

Cryptocurrency is not that miracle. Retail investors mom and dad left last May. Institutional investors gave up soon after and left the crypto sector with no intention of returning. The cryptocurrency magic tree is no more likely to lose pounds than it is to lose dollars.

As Chancellor of the Exchequer in 2021, Sunak wanted to launch a UK central bank digital currency, although the Bank of England is still looking for a use case. He planned to make the UK a crypto asset hub in April 2022, just before the May crash. He wanted the Royal Mint to issue an NFT in 2022, although the plan was scrapped a few months later when the crypto crashed and took the NFT market with it. Finally, Sunak gave a quote for the June 16z announcement about how he was determined to unlock opportunities for this technology and make the UK the center of the world for Web3, whatever that means.

Conservatives have long been fascinated by cryptocurrency. In 2018, following the bitcoin bubble of 2017, the Financial Times even published a series called Whats the Tory crypto story? featuring Baroness Michelle Mones’ initial coin offering (ICO), MP Grant Shapps’ involvement in a real estate ICO, and then-Chancellor Philip Hammond proposing blockchain as a solution to the issue of the Irish border.

The UK Parliament has taken a more measured approach. The 2018 Treasury Committee investigation led to closer scrutiny of the approach to cryptos for retail investors and an increased role for the Financial Conduct Authority. The science and technology committee looked into the blockchain industry in 2022. The Treasury committee conducted another investigation in 2023 and recommended that consumer trading in cryptocurrency be regulated as gambling. The Financial Services and Markets Bill, currently pending in Parliament, significantly strengthens the promotion of cryptocurrency and allows for much broader regulation of the field by the Treasury.

The a16z announcement is disconcertingly non-specific about what blockchains could actually do. Decentralization will apparently make all sorts of advances possible, even though the same promises have been made for blockchain since the mid-2010s and the industry has failed to do more than speculative gambling, money laundering and fraud since the launch of bitcoin in 2009.

The overwhelming use case for blockchain is to build well-understood and highly regulated financial instruments, but operate them out of the sight of regulators. Cryptocurrency and blockchain are promoted as technical innovations that leave existing monetary rules obsolete and make financial magic possible. It doesn’t, magic doesn’t happen, and it never happens when it’s money.

The main technical innovation of the blockchain is that you can generate a new unregistered penny stock system at the push of a button. There are about 7,000 stocks in the US, but somewhere over a million blockchain tokens, almost all of which would constitute securities offerings under US law. This gets you spam regulators with so many violations they can barely keep up. The goal is to achieve regulatory evasion velocity, like Uber or Airbnb. But unlike crypto, these companies had a popular product that worked for consumers, not just a get-rich-quick scheme.

a16z invested heavily in crypto tokens in 2021 and 2022, promoting the ill-defined term Web3 to encompass a wide range of technologies that did not exist outside of NFTs. The company has not itself issued any crypto tokens; instead, it funded other companies who then issued tokens. When these tokens were listed for the retail public on exchanges such as Coinbase, a16z could cash out its stake in months rather than the years it would take for a liquidity event in the conventional startup funding model.

Sticking to crypto, a16z is an exception in venture capital. Other venture capitalists have given up; investment in crypto businesses was $21.6 billion in 2022, but this year only reached $500 million, as of mid-May. a16z has over $300 million, face value, in cryptocurrency holdings, but dollars don’t exist in the market to cash in on such a big bag.

Cryptocurrency victims have finally learned that anyone who promises you a weird trick is selling you snake oil. Perhaps the British Conservative government will find out sooner rather than later.

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