LMAX boss David Mercer: ‘It’s foolhardy for crypto to take on the regulators’

In our latest Barron’s Live webinar, which took place on 16 February, Financial News met LMAX Group boss David Mercer, who founded institutional crypto trading venue LMAX Digital in 2018, and was one FN‘s Twenty Most Influential in Crypto this year.

Will the crypto crash prove to be terminal, or do digital assets have a future?

Our transcript below has been edited for clarity and brevity.

How is the crypto winter treating LMAX Digital?

It is just the ebb and flow of a nascent asset class. You can’t foresee the collapses, either [of FTX] in the Bahamas or the algorithmic stablecoin [terraUSD] earlier in the year. But if you look at a long time horizon and go back to the start of the pandemic, this asset class is still on the up.

We’re pleased with how LMAX Digital has navigated these waters and we haven’t seen any institutional customers of ours disappear. Of course, they are trading less and volumes are less, but we have always thought that this asset class and the launch of LMAX Digital was for long-term rather than short-term opportunity.

Many firms are embracing a ‘blockchain not bitcoin’ philosophy. Is crypto now a dirty word in traditional finance?

No. The banks see that blockchain technology can make back office functions more efficient, but they are also investing in the tokenisation of assets. If someone issues corporate debt, or someone lists a security on the blockchain, does that make it crypto? I’d argue it does.

The fact that we’re going to use blockchain in capital markets throughout the world is clear. Who knows what that asset is going to be? I think there is a slew of assets that will not be around in future. These are computer science experiments.

I don’t think anything other than bitcoin, or perhaps ethereum is proven yet, but it is here to stay. The institutions are aware that they will be investing in and moving cryptoassets in the years to come.

The UK recently launched a consultation on how to regulate crypto. What do you think of it?

It’s a good thing. The only thing worse than people talking about you is not talking about you, and it is good that they are recognising this asset class.

To be clear, it is still a small asset class and the adverse noise out there outweighs the size of it. I like the UK approach, which is to regulate the activities rather than the asset. With that approach you will see there are broad swathes of regulation that can be used for any asset. They mention that in the consultation with the existing anti-money laundering regime, the existing market abuse regulation and the existing disclosure documentation that is required.

READ What the UK’s new crypto rules could mean for traditional finance

The first thing regulators must do is protect consumers. For me, that seems to be the main basis of their consultation. It is very British. It is very well thought out. It is very sane. And it seems to try and adopt existing principles, frameworks and policies. So I think they should be congratulated for that.

A lot of countries want to be a hub in this space and it might be the case that the country that gets there first will win out, so we need to move quickly.

The elephant in the room around the consultation is that crypto is predominantly cross border. How are those regulations going to facilitate cross-border trade? How are they going to interact with regulation in the US and regulation in Europe? Those are a few things to be concerned about.

Some people have called for a globalised regulatory regime for crypto. Is that realistic?

No, that’s just not going to happen. I’d love to be out there theorising and saying ‘let’s have global regulation for crypto’. You’d have to wait until the year 2050 to regulate products that are trading in 2023.

However, regulatory bodies around the world accept other regulations, and they make the bar slightly lower if you have equivalence in other jurisdictions. People forget this about Europe. Before we were in the EU we had passports into Europe. There was equivalence.

That’s how regulators globally work together. Crypto is not going to be the first asset where there’s one great global regulator.

In the US, the Securities and Exchange Commission chair Gary Gensler has cracked down on various crypto products lately. Do you think he is anti-crypto?

Crypto evangelists might think the SEC is anti-crypto. There are some peers of ours who want to take on the SEC, which I believe would be a bad move.

From a regulator’s standpoint, it is pretty clear. If you have something that says ‘earn it’ or ‘lend it’, it is probably going to be a security. So you better register your security. It is pretty black and white.

There’s only one carve out in the Securities Act, and that’s for bank accounts. And by the way, if it is a bank account it is covered by the Banking Act, so go and get regulated by the Federal Reserve. I don’t see it as anti-crypto.

It sounds like you don’t agree with the anti-Gensler crowd…

I can see both sides of it, but I think it is foolhardy for the industry to take on those regulators. I saw one comment yesterday suggesting taking them to court. I have never seen that working. Enforcement is a key part of regulation. It prevents bad actors getting in.

READ The Fintech Files: Gensler on the warpath, and meet ex-Bitstamp boss Julian Sawyer

That said, the enforcement seems to have been before negotiation and before conversation. You would like some collaboration between the industry and the policymakers. I’m not aware that enough of that has happened. I’m not a fan of that first engagement being enforcement. Let’s have a conversation about it first. That is what happens in traditional finance.

If the US is too harsh on crypto, might companies flee to less stringent jurisdictions?

The US needs to be careful. It is the biggest economy in the world and the leader in global capital markets. We all assume the US is important to every asset class.

But if they’re too stringent and if they don’t engage then it is possible that their own institutions will move offshore. Frankly, that is what’s happening today. The biggest proprietary trading firms in the world are based in the US but they trade crypto from offshore entities. They have to because the framework is not clear. That is the same in UK and Europe.

Until you have clarity, you are not going to have those market leaders establish in your jurisdiction. It is not a given that the US or the UK will be capital markets hubs or crypto hubs 50 years from now if we can’t adopt and adapt to new financial instruments.

Where do you see crypto values going this year?

Thankfully, no one has ever paid me to make asset predictions. We’ve seen some recovery at the start of the year, but then again, traditional assets have recovered. Everyone is coming to terms with the fact we are either in or pre-recession, so all of that is priced in. But this might be a dead-cat bounce. If the UK and the US go fully into recession then I would expect cryptoassets to sell off along with traditional assets.

READMeet the Twenty Most Influential in Crypto

Longer term, there’s no doubt in my mind that we will see new highs in bitcoin within the next few years. I can’t say within the next few months. There’s not a lot of new buyers out there right now. Anyone predicting that this asset price doubles soon would be slightly deluded.

Some people have argued that the FTX collapse was a good thing for crypto. Do you agree?

What happened in the Bahamas is a bad thing for the industry, and it was a very bad thing for the clients and the traders on that platform. My heart goes out to those folks who thought they were trading on a safe exchange and have lost their funds.

But now, the crux of all regulation is separation of powers and segregation of duties. So there will be benefits. And hopefully, if we all get it right, we can protect consumers better.

My message to the whole crypto industry is don’t wait for the framework. You must act as if regulated now, and you must follow best practice.

To contact the author of this story with feedback or news, email Alex Daniel