Will you accept crypto becomes when will you accept crypto?
Crypto has achieved many things in its short life. It has been lauded as the next big thing while simultaneously being pilloried as an accident waiting to happen (or being an accident in the middle of happening). Regulators have spoken out against it at the same time as small investors have flocked to it. Pages and pages of content have been written explaining why this time, crypto is going to the moon. At the same time pages and pages of content have been written explaining why this or that incident is the final nail in the sector’s coffin. Regulators, governments, wholesale banks, retail banks, brokers, global social media conglomerates, news sites, have all had something to say.
Bitcoin, the father of all crypto, has once again had a fascinating couple of weeks, accelerating from around USD30,000 in mid-July to over USD49,000 at time of writing two end of August. This means that during 2021, the currency has enjoyed highs of USD63,000, lows of USD29,000 and sat at a range of levels in between. For comparison, with corona virus still delivering unprecedented economic uncertainty, EUR/USD has traded between USD1.17and USD1.23 in 2021.
There are a range of views about this. Some crypto enthusiasts say that this level of volatility is to be expected as bitcoin finds its feet, while detractors suggest that an asset with no intrinsic value, no regulation and little transparency is unlikely to deliver equilibrium. These views and everything in between are being aired each and every day. Sometimes more than twice.
The problem is that the noise that the enthusiasts and the nay-sayers are generating makes it very difficult to ascertain the reality of what is going on.
This is where Deutsche Bank’s recent discussion paper, Token power [ https://flow.db.com/more/technology/token-power ], offers a very useful contribution, bringing together the bank’s thinking about the future of money and the role that crypto could play within it.
The paper makes several worthwhile points but concludes by saying “While there is some way to go before any kind of regulatory alignment and the regulatory certainty enjoyed by traditional assets is not quite there for crypto assets as yet, it would be wise to assume that somehow regulators and the industry will work together to take the tokenisation journey forward. Nobody wants to be left behind.”
In many ways, this is the key point. No matter where you stand in the debate, it increasingly appears that crypto will have a profound effect on the financial services, and as a result it is something that will need to be accommodated. The price of not working out how to live in peace with crypto will simply become too high.
More to it than bitcoin
Bitcoin is the original and most publicly recognised example of a crypto currency (although it is being given a run for its money by certain prominent dogecoin supporters), but there are a myriad of different currencies out there.
And it is not just currencies. There are also a range of crypto asset projects that have been taking place, some of which are built around the non-fungible tokens that were capturing so many headlines back in March and April. The content creators may have moved on to other things for now, but the project teams are still in the process of delivering innovation.
Then there are the small companies looking to raise capital via token sales. The blockchains that underpin these projects make the management process efficient, deliver vastly enhanced transparency, offer automated, controlled lock-in periods and ensure that investors get their returns at the correct point in the process without the need for complex and expensive back-office procedures.
The Deutsche Bank paper cites a separate white paper by Deloitte, Are token assets the securities of tomorrow? [ https://bit.ly/2SSIaoh ], which offers a useful outline of four basic kinds of crypto-asset:
1. payment/exchange (e.g., bitcoin and equivalents)
2. security (investment components including ownership and promise of future cash flows)
3. utility (access to specific products, services or protocols)
4. hybrids of the above
In many ways, at this stage, we are simultaneously defining what these tools are and trying to work out what they can be used for.
Potential for a crypto take-over
As the Deutsche Bank paper points out, bitcoin itself has the potential to become another treasury tool and some publicly traded companies have already started converting cash in their treasuries into bitcoin as an alternative store of value. The volatility that has been inherent in the market highlights the level of risk that this strategy represents, but in the long term it could offer several advantages such as the speed and relatively low-cost associated with moving the asset.
This could create a further headache for regulators of course. What would be the position if a major corporation tried to take over a competitor paying in crypto rather than a fiat currency? We may not have to wait too long to find out.
The future is happening, like it or not
What is interesting is that away from the debate, there are several things happening that suggest that the sector is moving forward. Deutsche Bank is not the only institution that has offered its opinion on crypto’s future role in the financial services, and several organisations have set up trading desks to try and make the most of the volatility that the sector offers.
According to the Atlantic Council, a think tank devoted to international affairs, 83 countries, representing nearly 90% of global gross domestic product, have actively investigated setting up a Central Bank Digital Currency (CBDC) [ https://www.atlanticcouncil.org/cbdctracker ]. Of this 83, two have been cancelled and a further 10 are inactive, but 35 have either launched (5), in the pilot phase (14) or in development (16). That is a large proportion of central banks that are active in the space.
As the Atlantic Council’s report points out, if regulators do not develop new standards and international coordination, the financial system could face significant currency exchange problems in the future. This is not something that governments, regulators or the institutions that make up the global financial system are likely to accept.
What this means is that it appears that we have reached a tipping point. Over the last decade, crypto has gone from being a concept to an increasingly prominent part of the financial markets. The question is changing from will you accept crypto, to when will you accept crypto?
About Marco Quacken
Marco has a passion for business development that helps projects succeed and businesses flourish. With a global network of contacts, he brings teams together, matching expertise to requirements and implementing strategies that help good ideas grow into sustainable businesses. He has experience across a range of sectors including finance, real estate, technology, advertisement, automotive, consumer goods, energy, retail, sports and telecommunications.
