Britain Is Still Making Dumb Bets on Crypto

The tech venture capital firm Andreessen Horowitz, or “a16z,” announced on June 11 that it would be opening an office in the United Kingdom. British Prime Minister Rishi Sunak supplied a quote for the announcement, proclaiming a bright new blockchain-based future for Britain.

This might seem odd given the current state of the cryptocurrency market, which collapsed a year ago in a farrago of incompetence and fraud. Crypto enthusiasm was all the rage for politicians such as Salvadoran President Nayib Bukele and Miami Mayor Francis Suarez while the bubble was pumping. Getting into crypto now, however, is like buying Theranos stock after Elizabeth Holmes was exposed.

The Terra-Luna crash of May 2022 popped the crypto bubble of 2021. Prices crashed across the board—but, more importantly, trading volume crashed as retail investors took flight and the crypto economy’s inflows of scarce actual money dried up. Terra-Luna took down the Celsius and Voyager investment schemes, crypto hedge fund Three Arrows Capital, and many smaller firms through the second half of 2022. Sam Bankman-Fried’s FTX, a hollow shell since last May, finally fell in November 2022. Silvergate Bank and Signature Bank, both overburdened with unstable crypto company deposits, collapsed in March, prompting a banking crisis that was barely headed off by U.S. 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, alleging in both cases that their exchange operations violated securities laws. Both companies are treating the charges as a matter of life and death for their U.S. businesses.

Coinbase’s explicit hope is for Congress to write special new enabling laws just for it. But this is unlikely while crypto is perceived by the public, and hence politicians, as synonymous with fraud. Crypto’s best lobbying efforts were being filtered through Bankman-Fried’s Washington operations; with FTX out of the picture, even once-friendly politicians don’t want to be left holding the bag.

That means the chief hope for the crypto industry is to look outside the U.S. market. Coinbase is presently setting up a small operation in Bermuda. The European Union recently passed the markets in crypto assets (MiCA) regulation, which will take effect in 2024.

That might be where the U.K., especially under an increasingly desperate Sunak, comes in. The U.K. has not harmonized with the EU on MiCA and is actively deharmonizing on various other financial regulations.

The problem for Sunak and his Conservative government is that the U.K. is not doing well. The British economy took severe damage from Brexit, but retreating from Brexit would alienate the Tory base. Rampant inflation has outstripped wages, leading to widespread industrial unrest. Inequality is increasing: The Trussell Trust, the single largest organizer of food banks in the U.K., reported in April that more than 760,000 people had used a food bank for the first time in the last year.

The opposition Labour Party has consistently polled 10 to 20 points ahead of the Tories since early 2022, even without clear policies. Culture wars and jingoism aren’t turning the tide for the Conservatives. They’re desperate to find something, anything, in time for the 2024 election. They know they need a miracle.

Since the crypto crash, a16z has tried to get into the various technologies currently being marketed as artificial intelligence—though investment in AI companies will only pay out on the yearslong start-up cycle. Sunak has also seized on AI as a possible way out of his troubles, including pitching the U.K. as “the geographical home of global AI safety regulation”—ignoring the currently-in-process EU Artificial Intelligence Act, which is much more likely to set the global tone.

Cryptocurrency is not that miracle. The mum-and-dad retail investors left last May. Institutional investors gave up soon after and have abandoned the crypto sector with no plans to return. The magical crypto money tree is no more likely to drop pounds than it is to drop dollars.

As chancellor of the exchequer in 2021, Sunak wanted to launch a U.K. central bank digital currency—though the Bank of England is still looking for a use case. He planned to make the U.K. a crypto asset hub in April 2022—just before the crash in May. He wanted the Royal Mint to issue an NFT in 2022—though the plan was abandoned a few months later when crypto crashed and took the NFT market with it. Finally, Sunak gave a quote for a16z’s June announcement about how he was “determined to unlock opportunities for this technology and turn the UK into the world’s Web3 centre”—whatever that means.

The Conservatives have long been fascinated by cryptocurrency. Through 2018—in the wake of the 2017 bitcoin bubble—the Financial Times even ran a series called “What’s the Tory crypto story?” featuring Baroness Michelle Mone’s initial coin offering (ICO), MP Grant Shapps’s involvement in a real estate ICO, and then-Chancellor Philip Hammond proposing “blockchain” as a solution to the Irish border question.

The U.K. Parliament has taken a more measured approach. The 2018 Treasury Committee inquiry led to closer monitoring of crypto’s approach to retail investors and an increased role for the Financial Conduct Authority. The Science and Technology Committee looked into the blockchain sector in 2022. The Treasury Committee conducted another inquiry in 2023 and recommended that consumer trading in cryptocurrency should be regulated as gambling. The Financial Services and Markets Bill, currently going through Parliament, considerably tightens cryptocurrency promotion and enables much wider regulation of the area by the Treasury.

The a16z announcement is disconcertingly nonspecific on what blockchains might actually do. “Decentralization” will apparently make all manner of advances possible—even as the same promises have been made for blockchain since the mid-2010s and the sector has failed to achieve more than speculative gambling, money laundering, and fraud since the 2009 launch of bitcoin.

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

The main technical innovation of blockchain is that you can generate a new unregistered penny stock scheme at the press of a button. There are 7,000 or so equity stocks in the United States—but somewhere over a million blockchain tokens, almost all of which would constitute securities offerings under U.S. law. This lets you spam regulators with so many violations that they can barely keep up. The aim is to achieve regulatory escape velocity, in the manner of Uber or Airbnb. But unlike crypto, those companies had a popular product that worked for consumers—and not just a get-rich scheme.

a16z got heavily into crypto tokens in 2021 and 2022, promoting the ill-defined term “Web3” to encompass a wide range of technologies that didn’t exist—apart from NFTs. The company did not issue crypto tokens itself; instead, it funded other companies that then issued tokens. When these tokens were listed for the retail public on exchanges such as Coinbase, a16z could cash out its holding within months—rather than the years it might take for a liquidity event in the conventional model of start-up venture funding.

In sticking with crypto, a16z is an exception in venture capital. Other VC firms have dropped out; investment in crypto firms was $21.6 billion in 2022 but this year has reached only $500 million, as of mid-May. a16z has more than $300 million, face value, in cryptocurrency holdings—but the dollars don’t exist in the market to cash out a bag that large.

The victims of cryptocurrency eventually learned that anyone promising you “one weird trick” is selling you snake oil. Perhaps Britain’s Conservative government will learn this sooner rather than too late.