Rhian Lewis, Author of The Cryptocurrency Revolution
Ten years ago, few people had heard of Bitcoin. Cryptocurrency was something that a few enthusiasts discussed in online chat rooms, and the technological barriers of setting up software and/or hardware to acquire and transfer this purely digital cash were a deterrent to all but the most determined.
Quite simply, most people did not see the point of Bitcoin. In the first two years of its existence, its exchange rate with the US dollar was measured in cents. But by February 2011, it hit dollar parity for the first time and people in the wider community began to take notice.
It is something of a cliché to state that the least interesting thing about Bitcoin is its price – the fact that its value, in dollars, has risen from $1 in early 2011 to $60,000 in early 2021, with many wild peaks and troughs along the way makes for a fascinating story. However, the real story behind the rise of cryptocurrency is not the story of one asset price. It is the wave of financial and technological innovation that is sweeping all before it that is the real story.
Without Bitcoin, we would not have stablecoins, tokenized securities, Facebook’s imminent Diem payment system, central bank digital currencies or art NFTs such as the digital artwork by Beeple which was sold by Christie’s this month for $69 million. And, for me, the big story is the gradual merging of the crypto world into traditional finance that is the most compelling narrative.
As more and more companies opt to buy Bitcoin and add it to their balance sheets as a hedge against inflation, and as more retail investors decide to hold at least a small proportion of their own portfolios in cryptocurrency, demand has leapt for custody services that do not require any technical knowledge, or responsibility on the part of the owner. In February 2021, America’s oldest bank, BNY Mellon, announced the creation of a specialized digital assets unit to provide custody and other services for customers keen to dip their toes in the crypto waters. And the world’s first Bitcoin ETF (the Purpose Bitcoin ETF), launched in Canada in the same month, has seen huge inflows from both retail and institutional customers.
BNY Mellon’s new custody services, the world’s first Bitcoin ETF and accumulations of Bitcoin by companies such as Microstrategy and Tesla may be hitting the headlines, but in my opinion, one of the most interesting recent developments has been the January announcement by the Office of the Comptroller of the Currency that banks in the US are now allowed to use stablecoins for banking transactions.
The interesting part of this is in the nuance: JP Morgan have already been using their own stablecoin, JPMCoin, for internal cross-border transactions. This was already permitted within the rules because JPMCoin, which is pegged to the US dollar, is run only on the bank’s own infrastructure, thus restricting its use to internal purposes only. The new rules allow banks to leverage stablecoins that run on public blockchain networks: not only transferring them but also, if they wish, running validating nodes for these stablecoins and participating in network consensus.
While the use of stablecoins for banking transactions – especially across international borders – offers the potential to reduce much of the cost and friction associated with traditional payment rails, the OCC statement surprised many in that it did not restrict the use of stablecoins to central bank digital currencies – a specialized type of stablecoin – but instead opened up the possibility of banks using open-source currencies running on open-source software on unrestricted computer networks.
This seems to me a clear signal that the boundaries between traditional and non-traditional currencies and assets are beginning to blur – and when Facebook finally launches its own stablecoin Diem (renamed from Libra), we will see a third front opening up where privately issued currencies such as Diem compete with public networks such as Bitcoin and digital fiat currencies.
It is probably the last of these that will be most visible to retail customers, with China pushing ahead to get its DCEP digital currency into the hands of consumers in a further rollout of pilot areas, and many other central banks aggressively pursuing their own versions of digital cash. Regulatory changes and the new services and products offered by fintech companies will in turn force incumbent financial institutions to innovate and offer their own integrations with these new payment systems.
While I have so far talked mainly about cryptocurrencies and their use as payment and settlement systems, it is also important to consider other cryptoassets and how these might be changing the investment landscape.
Take tokenized securities, as an example. These can represent any type of asset, from real estate to commodities, artworks or shares, and have been easy for regulators to understand and develop appropriate legislation for, as the underlying asset is subject to the same regulations as the traditional (non-tokenized) version, and it is only the digital wrapper and the form of delivery that is different. Tokenized securities offer easier transfer, faster settlement and the easy incorporation of different rules or conditions, which can be written into the smart contract that governs them.
And finally, we are seeing the birth of something that could not be more different from the classic investment landscape: the issuance and trading of non-fungible tokens (NFTs) which can represent the digital right to own the original of a specific product: normally a collectible, in-game asset or artwork. While various cult classic NFTs have been quietly traded among crypto enthusiasts for several years now at prices ranging from tens of thousands to hundreds of thousands of dollars, the sale of underground artist Beeple’s piece The First 5000 Days at Christies for $69 million only serves to underline the fast-moving, often confusing but always innovative crypto asset landscape.
