Britain: the new El Salvador? [now with comments open]

by John Quiggin on July 19, 2022

When I first found out that the UK Treasury proposes to issue Non-Fungible Tokens (NFTs) as part of a general push to make Britain a world centre for crypto-currency, I assumed that this was a Boris Johnson stunt. The obvious model is El Salvador, where Johnson-style demagogue Nayib Bukele has made Bitcoin legal tender, with results ranging from disappointing to disastrous depending on who you read.

It turns out, however, that the source of the push is Rishi Sunak, until recently Chancellor of the Exchequer and now the favourite to become Prime Minister when Johnson leaves office. I don’t know anything about Sunak, but assumed on the basis of his job title that he would be a believer in “sound money”, hostile to, or at least sceptical of dodgy innovations like crypto.

I’m not fully on top of the issue yet, and would welcome clarifications from anyone better informed. It appears that Sunak is at least as confused as I am, and is pushing different, contradictory proposals.

The first to emerge, in 2021, was the idea of a central bank digital currency (CBDC). Such a development, would, in my view be kryptonite for crypto as it now exists, providing all the supposed benefits with none of the energy waste, scams and volatility we now observe. A CBDC would have radical implications which are still being discussed. In particularit, in effect, allow households and businesses to bank directly with the central bank, rather than holding digital deposits in existing banks. If successful enough, it could amount to nationalisation of the banking sector.

Unsurprisingly, banks and their advocates hate this idea. Here’s a critique from the Cato Institute, pointing to the likelihood that a CBDC would “give the central bank and the politicians that set its mandate the tools to much more easily manipulate economic activity.” https://www.cato.org/commentary/why-sunak-should-think-twice-about-central-bank-digital-currency pointing

It looks as if the predictable opposition of the UK financial sector has killed off the CBDC idea. Instead, Sunak has been pushing proposals to put the UK at the centre of the existing crypto market. Strikingly, it’s the dodgiest forms of crypto (NFTs and “stablecoins”), that are being pushed hardest.

As I’ve argued in the past, the fact that something as provably valueless as Bitcoin is now an accepted part of the financial system is evidence that any claims about the efficiency of financial markets are indefensible. The same can now be said about the idea that the UK Conservative party stands for sound economic management.

{ 10 comments }

1

MFB 07.21.22 at 9:47 am

Extraordinary, I admit. But he was someone whom Boris Johnson thought would be a good Chancellor of the Exchequer, meaning that it is hardly surprising that he should be engaged in what sounds like a national-scale Ponzi scheme. And wasn’t his first recommendation on running for PM to cut taxes in the middle of a huge economic crisis? No, it shouldn’t surprise anybody.

2

MisterMr 07.21.22 at 9:53 am

It’s funny because the original ideas about cryptocurrencies were that this way government could be shut out from money creation, with the implicit idea that money creation is fictitious wealth; now we have a government that wants to create money via crypto, presumably because cryptoes are still bubbling up (and are therefore a prime example of fictitious wealth).

Also people who are pissed of at governments for printing for some reason think that the value of cryptoes going up shows that cryptoes are working, whereas it shows just the opposite.
It’s probably something like a “saver” point of view.

3

Chris Bertram 07.21.22 at 12:34 pm

Yes, it is a stunt as opposed to a real policy

@MFB not really accurate. He became Chancellor after Johnson’s previous appointee, Javid, resigned in protest at having his advisor sacked by Johnson’s then consigliere, Cummings. Sunak was Chief Secretary to the Treasury at the time, so Johnson promoted him in the absence of a suitable alternative. This meant that both Javid (subsequently reappointed to Health) and Sunak were more independent of Johnson than other ministers and so were the first to set the snowball of resignations going. Nor is it accurate to say that he’s proposing tax cuts, that’s his rival, Truss: Sunak thinks they would be irresponsible at the moment.

4

J-D 07.21.22 at 1:09 pm

Nor is it accurate to say that he’s proposing tax cuts, that’s his rival, Truss: Sunak thinks they would be irresponsible at the moment.

Footnote: what polling there has been of Conservative Party members indicates that Liz Truss has a better chance of winning than Rishi Sunak, and all the bookmakers (that is, all the ones for whom oddschecker.com provides information) now have her replacing him as the favourite.

5

Bob 07.21.22 at 3:18 pm

A question for you John on the efficient markets hypothesis. What about the well-established fact that individual active investors are not able to pick stocks in a way that allows them to beat the relevant market indices on a consistent basis? Is that not evidence that, while the market can be wrong, there is some wisdom in the crowd that, over the long term and on average, is superior to individual research and insight? (By the way, I’m just as astounded as you are about Bitcoin, and for all of the same reasons. But is there perhaps something different going on in the stock and bond markets?)

6

Bob 07.21.22 at 3:27 pm

Sorry, one other point I forgot to mention in my last comment. I am familiar with Sharpe’s “Arithmetic of Active Management.” But that would only explain why the average dollar invested in the market can’t beat an index that reflects the average return in the market in any given year. My question concerns the inability of someone who goes against the crowd to achieve above-average returns on a consistent basis, year after year. All the statistics suggest that it is just luck that gets you into the top percentile in a given year, and that mean reversion soon sets in.

7

Max 07.21.22 at 3:36 pm

In Canada, the opposition’s finance critic (a Conservative!) is likewise pushing to make Canada a crypto hub, and he’s likewise top of the pack to replace the party leader. (Thankfully, they’re just the opposition. For now. The Liberals have been in power long enough that the Conservatives will be back in power sooner rather than later. Sigh.)

8

J-D 07.22.22 at 4:53 am

In Canada, the opposition’s finance critic (a Conservative!) is likewise pushing to make Canada a crypto hub, and he’s likewise top of the pack to replace the party leader.

For the benefit of those unfamiliar with the terminology, in Canadian politics ‘critic’ is a frequently used alternative for the term ‘shadow minister’ more familiar in the United Kingdom and Australia or for the straightforward description ‘Opposition spokesperson’.

9

Ebenezer Scrooge 07.22.22 at 1:06 pm

“CBDC” is a pretty fuzzy term, and different implementations are hated by different people for different reasons. Some CBDCs are intended to replace cash–they are beloved by macroeconomists (no zero lower bound) and law enforcement, and hated by criminals. Some CBDCs are intended to supplement cash. Some CBDCs are intended to replace banks’ role in the payment system–their opponents are obvious.

I don’t see how crypto disproves the efficiency of financial markets. Depends on what you mean for “efficiency” or “market”, I suppose. There was an untapped market for financial frauds, hucksterism, and law evasion. Crypto filled the demand very nicely, I believe. Crypto found a path to a new local minimum. Isn’t that what Pareto efficiency is all about?

10

Thomas P 07.22.22 at 6:47 pm

Bob, an alternative explanation would be that the market is so irrational that no matter how smart you are, you can’t predict it any more than you can predict the outcome of the roll of a die.

“The Market Can Remain Irrational Longer Than You Can Remain Solvent”.

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