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Philip Hammond: Big finance's move into crypto is unstoppable

·5-min read

Watch: Philip Hammond on why crypto adoption is unstoppable

Former UK chancellor of the exchequer Philip Hammond claims institutional adoption of the cryptocurrency characteristics of tokenisation and distributed ledger technology is now “unstoppable”.

In an interview with Yahoo Finance UK, the Conservative life-peer said that “trading characteristics that are currently associated with crypto assets will become normal patterns of business with conventional assets as they are tokenised.

"This is going to happen, we have probably got to a point where this is unstoppable,” said Lord Hammond.

Distributed ledger technology (DLT) is the blockchain-based bedrock that allows cryptocurrencies such as bitcoin (BTC) to bypass centralised financial authorities when conducting peer to peer transactions.

According to Hammond the progressive technologies that are the hallmarks of the cryptocurrency ecosystem will "bring many benefits and introduce significant efficiencies”. He listed the advantages of distributed ledger technology, such as “increased security, transparency, speed of settlement and lower execution costs for customers".

However, he warned that the consequences of onboarding these new mechanisms will be hugely disruptive to the existing financial services infrastructure. "The bulk of the disruption would be sustained by incumbents of institutional markets and that these market participants will be concerned about the disruptive effect on jobs in the sector."

The former chief financial minister emphasised the benefits of DLT and blockchain technology as "representing a huge opportunity for London and the UK’s financial services sector as a whole”.

He said: "Britain must seize this opportunity to remain a global financial services hub.” And described how the City of London has traditionally been able to exploit disruptive technologies and adapt faster than their competitors, but suggested a current malaise exists where City firms are preoccupied with “thinking about what the future looks like” because of post-Brexit complications. He urged the current Conservative cabinet to create the conditions for London to lead in this burgeoning space so that “regulators sit up and take note and respond appropriately.”

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Hammond is now a senior adviser with Copper, a London-based provider of digital asset custody and trading infrastructure. In his exclusive interview with Yahoo Finance UK, he described a growing sentiment within financial institutions that the technologies of the cryptocurrency ecosystem "must be embraced". He described the traditional finance sector as being on the “cusp of a collective decision” about the new disruptive technology and an awareness that “it is coming whether they like it or not”.

Watch: Hammond: UK's depleted gold reserves could be replenished with 'digital assets'

"In the past the instinct to smother it may have been strong, but now pretty much all the grown-ups in this space recognise that this is coming.”

Traditional financial institutions have come a long way in reaching this reversal in attitudes. The nascent blockchain-based solutions associated with cryptocurrencies and decentralised finance have gradually matured over the years. Now the margins can no longer hold them, the enemy is at the gates for traditional financial institutions. Hammond said that conventional financial services players would now have to ponder how much of the new technology “should be embraced, or the extent to which they should try and slow it down and get ahead of it”.

The former chancellor illustrated how a reversal in attitudes has also occurred amongst global central banks towards central bank digital currencies (CBDCs). He described the conditions when he was the UK’s chancellor of the exchequer, from 2016 to 2019, as being a harsh environment for such nascent ideas, where “most of the world’s central banks were trying to smother digital assets and prevent them from gaining a grip”.

He added that things have now changed. "Central banks are now looking at fiat digital currencies which could emerge in significant numbers worldwide.”

Read more: Bank of England holds interest rates at all-time low of 0.1%

After learning how China is charging ahead by conducting tests of its own ‘digital yuan’ in major cities, the Bank of England and the UK Treasury launched a joint task force in April 2021 to explore a potential central bank digital currency (CBDC) for Britain. China now plans to launch their digital fiat currency during the 2022 Beijing Winter Olympics. Hammond said other jurisdictions must learn from Beijing's endeavours to exploit "rapid follow-up advantage" and apply this to their own CBDC projects.

When asked about the UK's depleted gold reserves being replenished with a new digital store of value, Hammond said he did not think there exists wide public approval for the Bank of England to begin accumulating “current digital assets”, such as bitcoin.

"We ultimately digitise conventional assets. That is the form in which these things will be held at some point in the future,” he said.

Cryptocurrency aficionados use a phrase attributed to Ernest Hemingway when illustrating how the revolutionary technology will eventually become adopted by institutional finance. A character in Hemingway's novel The Sun Also Rises described bankruptcy as happening, "gradually, then suddenly". Advocates of the crypto-sphere have flipped Hemingway's adage to explain how acceptance of the new technology will gradually accumulate until suddenly the world adopts it, en masse.

The landscape of traditional finance is rapidly changing. Many institutions are now beginning to accept cryptocurrencies as a legitimate asset class. Major banking institutions are considering offering custodial accounts for cryptocurrencies, and both Ether (ETH) and bitcoin exchange-traded funds (ETFs) have been approved by regulators. The burgeoning technologies associated with the crypto-sphere are making major inroads as government budgets on both sides of the Atlantic declare more bowering to meet increased public spending commitments. The consequences of a growing debt burden, global supply chain woes, savings eaten away by inflation and a possible hike in interest rates have prompted a surge of retail investors to rush to the crypto-space. How much longer can major financial institutions stand by and watch from the sidelines?

Watch: Digital currencies: China will get there first, says Hammond