Haydn Jones
Haydn Jones is Managing Director at CrossChain FZE and a Senior Advisor at Kroll. Haydn has held senior roles in digital assets, financial services, central banking, and regulation covering payments, securities, and technology.
Haydn holds a First Class Honours Degree in Engineering, qualified as a barrister, and is co-author, The Executive Guide to Blockchain and Digital Currencies. He has worked in the blockchain and digital assets space for the last eight years, on a full-time basis, and can act as an expert witness in contentious civil and criminal matters as they relate to digital assets, globally. Notable cases include R v Wiersma, R v Dymock, R v Shone and LBR v Persons Unknown.
Haydn speaks regularly on matters related to blockchain and digital assets.
As part of the IVSC’s Professional Insights series, Haydn Jones, Managing Director at CrossChain FZE and Senior Advisor at Kroll, offers his expert perspective on the transformative potential of blockchain and digital assets, in an interview with IVSC’s Nicolas Konialidis and Richard Stokes. With extensive experience spanning digital assets, financial services, central banking, and regulation, Haydn provides a compelling exploration of the intersection between traditional finance and the emerging world of cryptocurrencies.
In this interview, Haydn discusses foundational concepts like fractional reserve banking and Bitcoin’s engineered scarcity, comparing its role as a store of value to gold. He also delves into the broader adoption of crypto technologies, their implications for securities issuance, and the challenges of regulation and valuation frameworks. Drawing on his expertise, Haydn presents a nuanced view of the opportunities and complexities that digital assets bring to the financial landscape.
So let’s jump into the questions. How should we think about the framework for crypto?
Haydn Jones (‘HJ’): I think the starting point is to ensure people understand fractional reserve banking. The idea of a bank is to provide credit to the economy. People deposit cash, and banks lend money out, facilitating credit in the economy.
This may seem like an odd place to start a discussion on crypto, but it’s crucial for understanding the broader implications of what crypto offers. If we look at the (slide image), we can see the separation of ledger payments, banking, and central banking infrastructure. The principal message here is that there are two forms of money: commercial money, derived from fractional reserve banking, and central bank money, which has full value.
A good example of central bank money is physical notes. For instance, the £20 note in my wallet is fully backed by an asset held by the central bank, such as gilts. In the UK, the amount of money in circulation is backed by assets – approximately £95 billion, or around four billion physical notes.
This concept connects us to Bitcoin, which also represents full economic value attached to a token. Bitcoin functions as a store of value, akin to central bank money. While central bankers might dispute this, it’s a defensible argument. Bitcoin is essentially a fully settled unit of economic value. Energy is expended to solve an arbitrarily difficult mathematical problem, creating something with intrinsic value, much like central bank money.
Starting with this framework helps unify the seemingly disparate systems of traditional finance and digital assets. This unifying framework sets the stage for leveraging the innovative ideas of digital assets to transform traditional finance.
So, in effect Bitcoin’s engineered scarcity, with a cap of 21 million units, is analogous to the scarcity of reserves or the backing of traditional assets. Would you compare this to gold?
HJ: Yes, it’s comparable to gold. Unlike money in general circulation, which is different, Bitcoin’s scarcity is similar to gold’s finite nature. All the gold mined globally could fit into a cube roughly 20 metres on each side. The analogy to gold is apt.
Where do we go from here in terms of adoption and future prospects?
HJ: This is an important question. To move forward, we need to help people understand how traditional banking, general ledgers, and payment infrastructures work. It’s surprising how few people grasp traditional finance, yet they find Bitcoin complicated. Understanding both is crucial for adoption.
Bitcoin is well-positioned as an investable asset. While some may disagree, it’s negatively correlated with debt and uncorrelated with equities. From a Sharpe ratio perspective – measuring volatility against risk-free return – Bitcoin optimises portfolios, making it appealing to institutional investors.
Regarding the broader crypto market, there are around two and a half million cryptocurrencies. We need to categorise their use cases. For instance, tokenisation can eliminate friction in traditional finance. Crypto exchanges already operate more efficiently than traditional stock exchanges, settling trades instantly, 24/7, without the heavy back-office structures traditional finance requires.
Adopting this technology could revolutionise securities issuance, banking, and payment systems. However, leadership and policy measures, including taxation and investment incentives, are necessary to drive adoption.
So, the first case is a medium of exchange or store of value, like Bitcoin and other cryptocurrencies. The second is a substrate for securities issuance, potentially bringing more stability to the financial system with state backing. Is that correct? Also, do you see evidence of Gresham’s Law in this space? Are higher-quality coins diverging from lower-quality ones?
HJ: Gresham’s Law – where bad money drives out good – applies here. Most Bitcoin issued is hoarded and doesn’t circulate, while lower-quality coins move around exchanges for various reasons. Metrics support this observation.
You’ve made a compelling case for adoption and use cases. How should we approach valuation frameworks for digital assets?
HJ: Valuation depends on distinguishing between types of digital assets. It’s too simplistic to lump them all under “crypto.” Broadly, there are store-of-value coins, stablecoins, utility tokens, and securities.
Traditional valuation frameworks apply to securities. Stablecoins, though straightforward, require careful scrutiny. Algorithmic stablecoins, for instance, have had mixed success. There may also be impairment criteria for stablecoins due to slippage from liquidity movements.
Utility tokens are unique. Their value often resembles a software license, offering access to services like storage or computing power. To value them, one must analyse their embedded and latent value.
For store-of-value coins like Bitcoin, valuation involves the energy expended to create them and their utility compared to similar assets, like gold. The subjective market sentiment, or “frothiness,” also plays a role, explaining discrepancies between theoretical and market values.
What are the regulatory concerns surrounding digital assets?
HJ: Current regulatory frameworks, such as the EU’s Markets in Crypto-Assets (MiCA), focus on anti-money laundering directives and financial crime prevention. While necessary, these regulations can disincentivise banks from adopting crypto technology. Effective regulation requires balancing innovation with oversight.
Leadership and global cooperation are key to fostering positive regulatory environments. Transformative technologies, like ChatGPT, show that innovation often precedes regulation. Digital assets will likely follow a similar trajectory.
What does client demand look like in your role, and how do you see it evolving over the next three to five years?
HJ: Our clients include virtual asset service providers (exchanges, custodians, wallet providers), governments (regulators, central banks, security services), traditional banks, retail users, and individuals involved in civil or criminal cases. Services range from penetration testing and valuations to corporate finance, insolvency, expert testimony, and compliance consulting. We don’t heavily engage with audit, tax, or accounting policy, but these areas complement our offerings.
Institutional interest in crypto, such as ETFs, is growing. What impact could this have on valuation and professional services?
HJ: Institutional involvement, driven by ETFs, adds respectability to the sector and highlights the importance of robust valuation practices. This shift will inevitably increase demand for professional services, enhancing market credibility and fostering broader adoption.