Nov 30, 2021

How Crypto Is Reshaping Finance and the World at Large

Fintech
Blockchain
Cryptocurrency
DigitalAssets
12 min
Global Blockchain and cryptocurrency matrix grid. Image used to depict how crypto is transforming the financial sector.
A comprehensive guide of the crypto ecosystem, from meme and stable coins, to underlying risks associated with the technology and the need for regulations

The growing popularity of cryptocurrencies is revolutionising the financial industry.

With the rise of bitcoin, cryptocurrencies and blockchain technology, there is no denying fintech is taking on an entirely new meaning.

This article discusses how cryptocurrency is reshaping fintech and the world economy at large. If you're looking to stay ahead of the curve, then read on!

Digital currencies are now worth more than fintech companies

While the combined valuation of the top 100 fintech companies was at circa $1.82 trillion USD at the time of publication, the total market capitalisation of the top 100 cryptocurrencies stood at around $2.44 trillion USD. 

It begs the question: what else might cryptocurrencies accomplish in the future if it can already outpace fintech companies by more than $620bn USD at such an early stage?

According to Stephen Pair, co-founder and CEO of BitPay, "Crypto usage has increased exponentially because it disrupted traditional financial systems. The ability to accept cryptocurrency expands a business' sales opportunity into international markets where accepting traditional credit cards is not practical. Credit cards were not designed for the Internet, and crypto has proven to reduce high fees, increase payment transparency and efficiency while also eliminating fraud risk. Similar to paying in cash, the consumer sends the exact amount needed for the transaction."

The rise of cryptocurrencies has also been driven by a desire for decentralisation and trustless transactions, two features currently lacking from the legacy financial system, but mastering this new technology will not be smooth sailing.

There are also many threats associated with crypto, whether it be price volatility, security or exchange risk. Furthermore, there are worries about bubbles, money laundering, organised crime and terrorist financing.

Is cash any safer than crypto for tackling crime?

Only 0.34% of cryptocurrency transactions were classified as criminal in 2020, with most of them being scams or related to the darknet market, according to a recent study by Chainalysis. On the other hand, cash money stood at 34-39%, according to a publication by the Independent Institute.

Notwithstanding, cryptocurrencies leave a trail, making them vulnerable to being tracked, as was the case with Silk Road and Ross Ulbricht, who got arrested following an FBI investigation and sentenced to life in prison. In reality, crypto has excellent potential for law enforcement departments worldwide due to its traceability.

On the other hand, cash is not traceable and offers anonymity, favouring payment for illegal activities such as drug trafficking or money laundering. Furthermore, cash does not leave an audit trail, making verifying transactions and account balances hard.

Furthermore, many governments are also moving in the direction of creating their own cryptocurrencies in the form of central bank digital currencies, and regulations are also starting to come into play.

A wake-up call for lawmakers: there is a pressing need to regulate cryptocurrencies

Besides criminal activity, there is also a need for regulation when it comes to financial stability risks associated with cryptos due to the diversity of liquidity and investor protection.

Erin Fonte, partner at Hunton Andrews Kurth, an American law firm, said, "The U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler said the agency would work with Congress, the Biden administration, and fellow regulators to close regulatory gaps. The SEC has brought several cases this year on the offer and sale of unregistered securities offerings and other alleged fraudulent activity involving crypto-assets."

She added, "But rules, guidance and enforcement actions from other federal and state regulators will continue to increase as well. The Commodity Futures Trading Commission (CFTC) and the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN), Office of Foreign Assets Control (OFAC), Office of the Comptroller of the Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) are all moving forward to regulate cryptos in their respective areas of authority."

Cryptocurrencies have been subject to different interpretations from regulators, with some being more stringent than others, thus creating an uneven playing field for those operating within the virtual currency space. This disparity can be seen by comparing China's complete ban on cryptocurrencies versus Japan's relatively less restrictive approach, which has led to a surge in cryptocurrency use.

Regulations are an essential step for cryptocurrencies as they make the rules clear and help businesses and consumers know where they stand. Without them, it is difficult for businesses to invest in cryptocurrencies or create digital asset products as they are exposed to risks with no comprehensible guidelines governing the space.

"States in the U.S. also continue activities in legislation, rulemaking and enforcement action regarding cryptocurrency, particularly in the area of money transmission regulation and unregistered securities offerings. For example, in Florida, all sellers of virtual currencies must submit an application to the state for an MSB license by January 1, 2022. Since July 2021, securities regulators in Alabama, Kentucky, New Jersey, Texas, and Vermont have brought cases against BlockFi, Inc. and its affiliates related to lending and borrowing in interest-bearing cryptocurrency accounts claiming the accounts are unregistered securities violating state securities laws," concluded Erin.

And according to Vivek Jasuja, Senior Vice President at Capital Markets Solutions, "Broad-ranging regulatory action on cryptocurrency is coming, possibly in conjunction with new legislation. This could decrease cryptocurrency prices in the near term, but if done properly, should provide a solid basis for the institutionalisation of financial products based on crypto-currency and digital assets powered by blockchain, as well as unleash waves of further innovation within financial markets."

A new economy where humorous assets are more valuable than banks

When considering the novelty Shiba Inu coin, which was created as a meme-coin and had a market cap of $1.75bn USD at the time of publication, is valued more than Starling Bank at $1.5 bn USD - it is hard not to think about what more serious cryptocurrencies with genuine use cases might accomplish.

In the short term, cryptocurrencies are forcing both traditional and new financial service providers to innovate as they observe from the sidelines for fear of losing out on a technological revolution that is gaining traction all around the world.

"Companies who conduct business internationally or send billions overseas often incur high fees and settlement delays of up to a week. Crypto payments have proven to have lower fees while also providing faster payment processing and settlement within hours, not days," said Stephen.

Democratising access to free markets and capitalism

Not only can cryptocurrencies help firms, but they may also assist underserved regions because they provide access to a worldwide financial system even for those without bank accounts. Free markets and capitalism are the best tools to reduce poverty and help people out of their situations, in which crypto acts as a channel.

According to Maxim Manturov. Head of Investment Research at Freedom Finance Europe, "The biggest innovation that fintech has the potential to bring by 2030 involves bringing comprehensive banking solutions to the estimated 1.7 billion people around the world who remain unbanked. This innovation will be driven by a universal financial infrastructure as borderless transactions, and universally accessible cryptocurrencies can help users to send and receive money with little to no associated fees or middlemen commanding a portion of the transaction for themselves."

"As an example, think about financial inclusion and subsistence farmers. This technology could allow that farmer to directly 'tokenise' and sell digital bushels of any crop in advance directly at a present value discounted rate, get paid digital cash instantly, use that cash to pay for supplies/seed or cover cash flow constraints and once the crops are ready the commodity tokens can be redeemed for the crops at the micro level," added Grant Colhoun, CEO of Okanii.

The most significant known use-case in stablecoins

Crypto is no longer viewed as a passing fad after years of taunting, defamation, intimidation, and mockery.

The most prominent known application of crypto seems to be in stablecoins. Imagine all the world's asset classes from properties, collectables and commodities to securities, infrastructure and currencies, all tokenised and put on a more liquid market.

In such an environment, the free market would allow coffee beans to be traded for Apple shares or British pounds or any other asset type of one's choice, all through one exchange. Issuers would not produce such tokens out of thin air since they would be backed by the underlying asset class shown in the circulating supply.

Furthermore, it would provide market access to individuals who previously couldn't buy in because only the wealthiest could do so. For example, someone could own 0.002% of Heathrow airport and instantaneously trade it for 0.01% of Wembley Stadium in token form and backed by the physical assets.

Stablecoins hold the potential to allow anybody to trade one asset class to another against each other without the need for intermediaries. This idea of a liquid global market built on blockchain technology is what makes stablecoins so exciting and why they could come to play such an essential role in the future.

According to Grant, "We are entering the tokenisation economy. Currently there is $500 trillion of value (181 currencies, stocks, bonds, commodities, derivatives, data, intellectual property, real estate, identity) stored in tens of thousands of custodians (banks, financial institutions, telco’s, exchanges, brokerage houses, PE/hedge funds, companies, merchants, consumers) and the cost of storing and moving value between these custodians/silos at a wholesale level is a ludicrous amount let alone at a retail level."

The risks associated with cryptocurrencies

As with any technology, there are things that could go terribly wrong with the application of cryptocurrencies too.

Cryptocurrencies are subject to cyber theft, malware hacks and phishing attacks through malicious websites or apps that steal your private keys. Furthermore, cryptocurrency exchanges have been compromised in the past. Bad actors stole millions by using social engineering techniques such as phishing sites for traders who wanted to purchase crypto on these exchanges.

In other cases, the price of a cryptocurrency might be manipulated by criminals who can front-run or pump and dump them on these exchanges. This type of financial crime often happens because many cryptocurrencies sometimes lack liquidity given their low market caps in relation to traditional markets such as stocks. Therefore, they are easier to manipulate since it takes a few dollars spent buying many coins for the price to move in one direction or another.

Also, given that all transactions on a blockchain network are visible and traceable by anyone who knows how to read the transaction data, there is potential for criminals and terrorists alike to hide their money trails through cryptocurrencies such as Monero (XMR) if they wish.

Financial bubbles are another risk that should be considered, as was seen with the dot-com bubble from 1995-2001. In those two years, any company connected to internet and technology stocks saw their stock prices rise tremendously due to little business fundamentals and valuations based on future potential profits rather than current earnings or revenue generation. This bubble led many investors who bought into these companies only to lose their money in the long run.

Cryptocurrencies are influenced by a similar hype cycle, where investors jump onto them and cause massive price appreciation without any fundamental business model behind it to justify such valuations. The end result can be financial losses for those who buy into cryptocurrencies that fail or were merely scams from the get-go.

Another risk comes from quantum computers, as already mentioned. Cryptography as it is currently used, such as 256-bit private keys, can be broken by a sufficiently large quantum computer that would have the processing power to do so. This threat means a large enough machine and can run through all possible key combinations for encrypted data and eventually decrypt it. As such, if someone were to build a large quantum computer in the future and take advantage of this fact, then all existing cryptographic keys that are used today would be vulnerable to attack. Non-blockchain-based systems such as digital-only banks would be in a far worse position in terms of vulnerability.

While many of the dangers are real, there is also an inverse risk to be aware of regarding cryptocurrencies. Most applications built on blockchain technology have financial institutions in mind as their target market. That said, criminals or terrorists may not necessarily use crypto for sinister purposes as they would practically prefer to use cash or other means to transact anonymously, as previously mentioned.

The asset-backed token market of the future

The United States leads the way in digital asset innovation. Already, there are cryptocurrencies backed by their fiat currency, namely the US Dollar, in the form of Tether (USDT) and USD Coin (USDC). In the future, they might not only impact trading and investing, but also payments. According to Jona Georgiou, General Manager of Global Payments at Lightspeed, "We live in a global economy, but the payments landscape is still very fragmented by region and class, so payments providers will have to find global solutions that work for both merchants and consumers. We're also thinking about how cryptocurrencies will factor into payments in the future."

Furthermore, there are also cryptocurrencies backed by commodities, such as gold in the form of PAX Gold (PAXG). In addition, there are startups experimenting with properties backed by stablecoins and exchanges like Binance testing tokenised securities like Apple, Tesla, and Coinbase shares. All the assets mentioned above, excluding securities, can already be exchanged against each other in crypto form.

Adding to the concept of security tokens, Arnab Naskar, co-founder of STOKR, said, "Security tokens combine the benefits of a traditional IPO with the ease and flexibility of tokenisation. However, unlike a crowdfunding platform where a promissory of a future product is for sale, investors purchase equity in a company, possibly with revenue or profit-sharing rights. Where this differs from an IPO is with the underlying technology. Security tokens are similar to shares in a company but live on blockchains, and are highly liquid, transparent and verifiable, with additional programmable benefits."

He went on to add, "Security tokens are unique because of their programmability. A new dimension of value can be created, such as profit sharing, perks such as discounts, owner-only access to events, and special voting rights. This means that FinTech companies do not need to deliver an actual product today, which takes some of the pressure off, and can get creative with their equity offering."

The future of cryptocurrencies

Digital currencies are not just about making payments more efficient; they can also provide a new way to store value and transact within the global economy. People will also have more choices when it comes to their savings instruments.

Cryptocurrencies are a unique type of fintech with the potential to transform every vertical of the financial sector, from trading and investments to payments or lending. They could also be used for criminal purposes, but so could cash, gold, or any other medium of exchange. Where some crypto-related projects are high risk, others could be a lower risk if they have a sound business model.

"The granularity and flexibility of this type of tokenisation model will usher in a level of prosperity and freedom never before seen in the world. Everyone will have complete control over their assets and can trade any value instantly. The potential impact of this micro-payment tokenisation revolution can not be underestimated. If you can profitably move $0.01 across any use-case or asset type instantly and globally, you can monetise every conceivable business model," noted Grant.

In summary, cryptocurrencies offer a more liquid, borderless, fast and secure medium of exchange than traditional asset types. Given the speed at which this technology is evolving today, it will be interesting to see how these digital assets and their underlying blockchain technologies evolve in the coming years.

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