After more than 10 years since Bitcoin was created, a panel of experts within the cryptocurrency ecosystem, including Will Coleman, Seth Ginns (CoinFund), Eric Jackson (TransitNet), Peter Marshall (Walden Bridge Capital) and Patrick South (Chamber of Digital Commerce), discussed the maturity of the cryptocurrency marketplace at our recent Cohen Client Conference.
The discussion covered a plethora of topics, including adoption of the public at large and impact on the fintech world as a whole, comparison to the equity markets and next steps for greater maturity, the differences in the United States versus the international scene, and regulatory opportunities and challenges to maturity. With a lead off question of “rate the current maturity of the cryptocurrency market on a scale of 1-10,” not surprisingly the responses ranged from two to six. The following recap summarizes some of the main reasons the jury is still out on how far this industry has come, or watch the full Cohen Client Conference session.
Regulatory Guidance Contributes to Maturity
The panel spent some time discussing the contribution regulatory guidance has made to the maturity of the cryptocurrency ecosystem. In particular, their interpretation centered around the impact the Office of the Comptroller of the Currency’s (OCC) recent guidance will have on the custody environment. The OCC published an interpretive letter in July 2020 clarifying the authority of national banks to provide cryptocurrency custody services for customers. This letter described safekeeping and custody services for a wide variety of customer assets and also focused on the authority of banks to safeguard the cryptographic keys associated with cryptocurrency.
The panel also evaluated the impact of the Financial Crimes Enforcement Network (FinCEN), following the implementation of the Bank Secrecy Act’s (BSA) Travel Rule. As the leading AML/CFT regulatory body in the U.S., FinCEN has been actively engaged with the SEC and CFTC in the areas of both guidance and enforcement. The BSA’s Travel Rule requires money services businesses that transmit funds to also transmit information about the sender and recipient. Cryptocurrency exchanges and companies have developed and continue to enhance the technical solutions to ensure appropriate anti-money laundering and countering the financing of terrorism controls are in place.
There are regulatory cross currents around the globe — Singapore and Hong Kong have long been a source of innovation and promoter of growth in the crypto markets, while the U.S. has been slower as its regulators focus heavily on greater consumer protections. But clearly we’ve seen a shift in the U.S. regulatory environment over the past year. Some of this tailwind noted within the U.S. might be attributed to the talent transitions, as experienced professionals from the traditional markets move into the crypto space and crypto experts make moves into high profile roles within the regulatory environment.
One question is whether Congress poses a log jam to the widespread adoption of cryptocurrency. A comparison can be made to the history and emergence of crowdfunding. Washington D.C.’s support of crowdfunding (via Regulation CF and the JOBS Act), along with the removal of the ban on general solicitation that prevented entrepreneurs from publicizing they were raising money, directly contributed to crowdfunding platforms and campaigns becoming widespread and mainstream. Congressional leaders accepting cryptocurrency campaign donations and the near term potential for IPOs within the crypto marketplace reinforce the idea that the maturity level is on an upward trend.
Aggressive Rise of the Decentralized Exchange and Finance
Decentralized finance (or DeFi) is a shift from traditional, centralized financial systems by using blockchain technology and cryptocurrency to disrupt and transform the means of doing business. Stablecoins are one such example of a DeFi project, using Ethereum smart contracts to move value in a more accessible and transparent manner.
Decentralized cryptocurrency exchanges (or DEX) is another DeFi application experiencing growth as a peer-to-peer online service that allows direct cryptocurrency transactions between two interested parties. The DEX allows traders to independently store and operate funds and can make transactions without third party involvement. This differs from the traditional exchange in that it is managed by the platform participants rather than by a company with responsibility for governance. DEXs give increased liquidity to the crypto marketplace without the burden of listing fees.
Liquidity mining, peer-to-peer lending and borrowing, staking and gaming are just a few other protocols within the DeFi ecosystem, which has seen considerable growth in 2020. Collateral backing DeFi projects at the beginning of 2020 was $700 million and is now at $11 billion.
Significance of Stablecoins and Central Bank Digital Currency
A significant indication the cryptocurrency market is maturing is the diversification and growth of stablecoins and central bank digital currency. Fiat-backed stablecoins saw tremendous growth in 2020, and since their conception nearly eight years ago. The largest stablecoin, Tether, increased in circulation from $4 billion at the beginning of 2020 to over $15 billion currently. Stablecoins are being credited as the bridge between traditional assets and cryptocurrencies by providing some protections for price volatility within the crypto market. Stablecoins, as a digital currency, can be used to make payments across the world and facilitate faster and more secure cross-border payments at a reduced cost than traditional currency.
The fiat-backed stablecoin may be here to stay for the long-term or they may be filling an interim gap until sovereign governments issue their own central bank digital currency (CBDC) for the retail marketplace. The digital yuan backed by the Chinese government is one such example of the growing maturity in the crypto market. China has been further ahead in the digital payment curve than most countries to deter fraud and corruption, and to reduce health risks associated with exchanging physical cash for payments. But they aren’t the only sovereign nation taking steps towards a CBDC and making announcements of their progress in 2020. The European Central Bank has also recently said it plans to prepare for the launch of a digital euro in the EU. The possibility of a privately run, global currency like Libra from Facebook, which has nearly 3 billion users, could be the motivator for more governments to make progress on their digital currency projects or, at a minimum, shore up the regulation of such.
Whether ranking the maturity at a two because it does not meet the criteria for “widespread adoption” or has limited mechanisms for widespread investment like an exchange-traded fund, or at a six because you’ve closely monitored the growth over the last 10 years and in particular within 2020, one thing is clear — cryptocurrency continues to be a force for change and in a constant evolution. All engaged in this panel were excited to visit the topic of its maturity both now, next year and in another 10 years.
>> Watch the full Cohen Client Conference session.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.