TechNotes – Top 10 issues for digital currencies

“Cryptocurrency market value jumps $35 billion in 24 hours led by a surge in bitcoin .”

CNBC, 30 April 2020

1. Regulation: Regulation has been the buzzword in crypto asset circles for years now, and it hasn’t gone away yet. Markets around the world are regulating crypto asset businesses faster than ever – in the last year we’ve seen European-wide regulation, plus specific new regimes in Germany, Singapore, Canada, Mexico and others. It is getting harder and harder for crypto businesses to operate indiscriminately across borders, and this is only going to continue.

2. Regulatory enforcement: The United States has led the way on crypto enforcement to date and has claimed, or is currently trying to claim, some big scalps in crypto. Telegram’s own crypto project has been hit hard by the United States Securities and Exchange Commission, and others such as Kin are similarly embattled. This trend will continue in the US, but expect to see it happening more and more in other jurisdictions, particularly the UK and Europe.

3. Geographical arbitrage: The crypto industry globally continues to consist of a broad spectrum of businesses, ranging from highly compliant with regulation, down to extremely opaque with little to no regard for regulatory requirements. It is expensive to comply with law, and as a result, compliant businesses find it hard to compete with those based in more lightly regulated jurisdictions. Expect to see this change as regulation (and knowledge of it) increases globally and it becomes harder to operate outside of the law.

4. Market consolidation: Mergers and acquisitions are becoming significantly more common in the crypto assets industry in recent years. We’ve seen Coinbase being incredibly acquisitive with the purchase of Neutrino, Xapo, Earn.com and others, BitGo acquire Harbor, Kraken acquire Crypto Facilities and Binance acquire CoinMarketCap. As costs increase and revenues squeeze, M&A activity will become inevitable and the large platforms will consolidate their positions.

5. DeFi: The market is seeing a strong move towards decentralised finance – software protocols operating on blockchain that massively reduce the cost and complexity of providing exchange, lending and other crypto services. This is placing strain on the margins of more traditional centralised operations and accordingly most crypto businesses are rapidly diversifying into DeFi to compete. DeFi is growing so quickly, many predict it is an unsustainable bubble.

6. Moving towards utility phase: The “utility phase” of crypto (when other uses for crypto assets beyond speculative trading become widespread) has long been discussed and there are green shoots of possibility in this area, but no killer application has yet emerged. Expect this to continue to be a major focus of the crypto industry in the coming 12 to 24 months.

7. Concerns of policy makers: As many saw with Facebook’s Libra project, policy makers worldwide have concerns about any ambitious crypto asset projects and what they will mean for the status quo of central bank-issued fiat currency. A private currency scaled to the size of Facebook’s user base could present a global threat to governments’ ability to manage the supply of money, and raises privacy and other concerns. Libra continues in a more regulatory-friendly form for now; other projects will appear in Libra’s wake as the tech giants look to leverage their sizeable and relatively captive user bases further.

8. Central Bank Issued Digital Currencies: One early achievement the Libra project can point to is that it brought into focus how little central banks across the world have been considering innovation in fiat currency. Since then, a flurry of activity has occurred worldwide for central banks to consider how they might directly issue “digital cash” to populations, instead of working through banks. The People’s Bank of China is leading the way on this, having already started trials of a solution. Others are following loosely behind. One thing is clear – widespread adoption of “CBDCs” will entirely change the way that fiat currency works.

9. Access to talent: Access to skilled engineering resource within the crypto industry remains difficult and the market for this skillset is competitive, particularly in Northern California. This has led to, and will continue to lead to, acquisitions driven not by size of user base, but by the technology available for the taking. In many cases it is now easier to acquire a business that has developed a tech solution to a particular problem, rather than have to acquire the people that can build a solution for you.

10. Litigation risk: Consumer-driven litigation against crypto businesses is on the increase. Crypto exchanges in the US in particular face a broad range of litigation threats, including class action lawsuits. Whilst many of these are baseless (arguing for compensation for trading losses due to market movements, for example) they cost time and money to defend. Whilst this is unsurprising in a litigious environment such as the US, this trend can be expected to spread to other areas of the globe as consumers seek to cover losses, particularly where there are breaches of new regulations that bring additional rights or protections for consumers. In the meantime, the English Court has found that crypto-assets are capable, in principle, of being property under English law in two recent cases, endorsing the ground-breaking analysis of the UK Jurisdiction Taskforce.

Found this article useful? Read others in our TechNotes series.