A shadow banking system may be resulting from the hype around crypto currency – and ironically the UK’s advertising authority appears more concerned about damage than does the financial regulator, says Martin Finnegan, of Punter Southall Law.
Recently on Dutch TV, Christine Lagarde, President of the European Central Bank added her voice to those who have already expressed the view that cryptocurrencies are worthless. But in reality, is anyone listening?
Whilst Lagarde may not be right about all crypto-assets – such as NFTs – she is, I think, right about the value of crypto-currencies. Ask yourself whether any other asset class(es) has ever been described in a similar manner by any central banker or regulator…..and perhaps that’s because cryptocurrencies are not assets.
Regardless of what price any individual currency actually trades for, cryptocurrencies are not assets in any conventional real world sense. Nor does it lead to protective recognition in any regulatory sense.
Shadow banking
There is a legitimate question as to whether the sheer volume and scale of crypto currency speculation is now forming part of a shadow banking 2.0 system and if so, whether that could ultimately destabilise conventional markets just as the dotcom crash did at the turn of the century.
The answer is, I think, quite possibly – not necessarily as a definitive cause but because it will add fuel to the recessionary flames already sparked by the impact on conventional markets of Russia’s war on Ukraine and also, the long awaited but predictable readjustment to the hyped valuations in the tech sector.
And what then?
Price-volatility has of course been the hallmark of cryptocurrencies and the draw for speculators. However, price collapse will mean that the game is up and, when the death spiral occurs across all cryptocurrencies, it will inevitably exacerbate recessionary forces. Why? Because the loss of serious corporate and institutional real fiat money in the crypto-system will not be available to invest in real world projects.
“Irrational Exuberance”
Alan Greenspan, former Chair of the US Federal Reserve, coined the term “irrational exuberance” in 1996 when he asked: at what point do we know when irrational exuberance has unduly escalated asset values? The Yale Professor, Robert Shiller, author of the book ‘Irrational Exuberance’ and the apparent source of Greenspan’s original use of the term, defines it as:
“the psychological basis of a speculative bubble…. a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others’ successes and partly through a gamblers’ excitement”
More than 20 years post the publication of this work, Shiller cites bitcoin as the best modern-day example of it and without doubt, we’ve all seen examples of “psychological contagion” over the past couple of years.
Regulation – Irrational Apathy?
Whilst crypto-speculation may be fuelled by excessive enthusiasm, the same cannot be said of the regulators. Whilst the FCA and other regulators are on public record stating that people should not stake more than they can afford to lose – the default regulator position with any form of gambling – they do not appear to be going far enough.
It seems ironic that the Advertising Standards Agency in the UK has done more to limit the promotion of cryptocurrencies than the FCA in recent times. In March 2022, it announced that it had issued more than 50 enforcement (guidance) notices regarding cryptocurrencies in order to require adverts:
• to make clear that cryptocurrencies are unregulated in the UK and that the value of investments are variable and can go down;
• neither state nor imply that investment decisions are trivial, simple, easy or suitable for anyone; nor
• imply a sense of urgency to buy or create a fear of missing out, or that investments are ‘low risk’.
The FCA is failing to exercise and implement equivalent and appropriate regulatory oversight. Why – if the ASA is exercising its’ powers to protect the consumer – has the FCA failed to bring in an outright ban with sanctions for enablers of cryptocurrency trading?
But perhaps its greater failure is its talk of adopting central bank digital currencies. Firstly, they are not going to happen overnight – ECB officials are working to a four-year timeframe – so such discussion is premature given the heady world we’re in and secondly, the fact that central banks might ultimately adopt digital currencies arguably and wrongly confers a legitimacy on today’s non-central bank digital currencies. Promoters of cryptocurrencies and crypto exchanges are, for obvious reasons, very happy for their customers to make that association. The comparison from which they benefit is wholly misleading – less of an apples to apples comparison than a fresh to rotten apple comparison.
Morrissey’s complaint
The title of this article – the world won’t listen – might resonate with readers of a certain age; it is the title of a Smiths album released in 1987 reflecting Morrissey’s belief that mainstream radio was not paying attention to the band and delaying their break-through. Legarde, regulators and central bankers may well then be the Morrissey and Johnny Marr of 2022; they may be in broadcast mode but they are being loudly drowned out by the crypto din.
But to end where I started: once the music stops and the crypto-currency party comes to an end, there’s going to be an almighty hangover….and one way or another, the party will stop.
*Martin Finnegan is chief operating officer at Punter Southall Law
© 2022 funds europe
In today’s globalised investment environment, fund managers can more accurately target their investor bases by establishing funds across borders….
Operational risk is defined as the risk of losses stemming from inadequate or failed internal processes, people, and systems, or from external events.[1] This also includes legal risk…
The Securities Industry and Financial Markets Association (SIFMA), the Investment Company Institute (ICI), and The Depository Trust & Clearing Corporation (DTCC) last year…
For emerging managers – any firm newly launching into the asset management market – choosing partners is a crucial exercise, and that includes the fund domicile….
The Irish Limited Partnership rules increase Ireland’s attractiveness as a domicile for private assets and INDOS Financial (Ireland) Depositary Limited…
Designed as a payment tool, cryptocurrencies have attracted the interest of asset managers as the promise of returns is so high.
ETFs are emerging as a viable means for institutional investors to gain exposure to bitcoin and other cryptocurrencies, says Alexis Marinof, WisdomTree’s head of Europe, in an interview with…
David Hunt (pictured below), president and chief executive of PGIM, tells Romil Patel about leading a top-ten global asset manager through a remarkable era of change.
Our latest Ireland roundtable saw fund management head Robin Creswell join a panel of Irish funds experts to discuss AIFs, Ireland’s CP86 governance project, and the potential for
ESG events that have captured attention in the past year, and the evolution of attitudes to ESG-based returns, are two topics our expert panellists discuss.
Our Ireland roundtable saw fund a panel of funds experts convene to discuss AIFs, Ireland’s CP86 governance project, and the potential for the Emerald Isle to be a ‘green’ hub.
Watch our webinar where we look at the challenges that the new EU Taxonomy regulation brings, and gain a better understanding of the merits of technology to inform accurate monitoring and reporting.
Join our mailing list to receive our latest news updates, magazine features, thought leadership and market research & analysis.
