After a decade of expertise, technological improvements, and increased demand, we are seeing new innovations in cryptocurrency. The ecosystem is evolving rapidly and anything we might see or say today might be very different by this time next year, and certainly in 5- or 10-years’ time, says Erica Stanford
Cryptocurrency – specifically Bitcoin, the first and still dominant digital currency – are game-changing. Bitcoin, and the ensuing ecosystem that has built up around it, have brought some incredible ideas, innovations, and changes to the world of traditional finance and have achieved some great things. While fiat currency solves a great many problems, there are still many (an estimated between 1.7-2.5 billion) people around the world who can’t access traditional banking.
Crypto also offers, in some cases, the ability to send money for almost free and in live time internationally, no matter if the amount is less than 1p or $1 billion USD. It also offers a level of transparency and traceability one can’t so easily get with fiat currencies. Any fraud analyst will say they are grateful when a case involves Bitcoin over fiat – it’s easier for them to trace.
But how exactly do crypto markets work?
The cryptocurrency industry, hot on the lips of tens of millions of people every day, all started with the vision of Satoshi Nakamoto. We’ll likely never know who the person (or perhaps people) behind this alias was/were, but maybe that’s for the best – and arguably is part of the reason why Bitcoin is so trusted. In 2008, Satoshi published Bitcoin: A Peer-to-Peer Electronic Cash System, and in the 13 years since, Bitcoin has undergone a massive snowball effect – in awareness, adoption, ease of use and now user experience, with a great ecosystem now providing institutional-grade security in purchasing, custody and transactions. In the white paper, Satoshi correctly predicts the growth of Bitcoin, stating that ‘It takes advantage of the nature of information being easy to spread but hard to stifle.’
After Bitcoin, the first-generation blockchain, came the challengers (second-generation blockchains), including Ethereum, which has developed a whole ecosystem of its own. It’s not clear exactly how many cryptocurrencies there are now. Coinmarketcap lists more than 10,000 but it’s thought there are many more. A fraction of this is actively traded. Far less than that have any value or use case. It’s estimated that around 98% of the thousands of cryptocurrencies launched as ICOs in the initial coin offering bubble of 2016-2018 are either scams, failed, or dead. It’s thought that 98% lost their investors’ all of their money.
After a decade of expertise, technological improvements, and increased demand, we are seeing new innovations, use cases and projects pop up, with these being described as third generation blockchains. Some are designed to solve the continual blockchain issues: scalability and interoperability, some are aiming to use as little energy as is used in any other digital transaction, some are aiming at sending cheaper transactions.
The ecosystem is evolving rapidly, with many of the world’s smartest tech and finance minds getting into the crypto space early on. We are seeing an incredible brain-drain of many of the sharpest innovators in traditional industries – banking, finance, retail, defence and more. People are leaving well-paid, senior jobs to work in crypto startups because they see it as more exciting, faster moving, more innovative or more transformational. In short, to many, traditional finance is moving too slowly or in the wrong direction, and many are taking their knowledge, experience, expertise, and contacts with them. I’ve never seen a space move as fast as crypto – anything we might see or say today might be very different by this time next year, and certainly in 5- or 10-years’ time.
How can crypto be spent, and what’s next?
Bitcoin has primarily been seen as a store of value, and one of the main doubts surrounding mainstream adoption of crypto seems to be its ease of being spent. People often ask if [insert cryptocurrency here] will ever be able to be spent like real money. It’s already possible to spend crypto like it’s real money. Payments can now be quite easily made, if one so chooses, from crypto wallets, or QR codes can be scanned. The UX isn’t as good as some traditional fiat payment apps, but it is improving, and fast. More commonly, there are now a host of different crypto cards from Coinbase, Binance, and Crypto.com, among others. These allow crypto to be spent as if one were using any other card. User experience in crypto has long been a challenge but the range of wallets and cards are now opening digital payments to a potential billions of people.
In its early years, buying, storing, and spending cryptocurrency was incredibly difficult and accessible only really to the more technically advanced. User experience is now the number one focus for a lot of crypto projects. There are now institutional grade safety and custody solutions to store crypto safely, as well as easier to use hard and online wallets. To buy, there are institutional funds or exchanges and sites allowing anyone to buy crypto with just a simple card payment and varying levels of KYC. Everything about the user experience is easier than ever before in crypto. There are now naming services being developed where anyone who has your contact details will soon be able to send you crypto without needing a Bitcoin or other cryptocurrency address, much as we can send photos or messages on WhatsApp or other messaging platforms today.
Facebook has, perhaps controversially, done a lot for this. With years of development of their project now called Diem, Facebook has, with its 1.8 billion monthly and 2.5 billion overall users, caused quite the stir with its aim to bring about a global stable cryptocurrency. Diem could – if given its way by the world’s regulators – change how the world sees not just crypto but peer-to-peer payments. Facebook has enough users, money, and sway to make this happen. It has demonstrated enough times its attitude to getting things done (the documentary The Great Hack is still well worth watching on this) so the prospect of Diem has made companies, governments, banks, and regulators around the world look up and take note.
What we will see more of is stable, asset-backed cryptocurrencies, backed by real world dollars or other currencies. These might be stablecoins, potentially even launched or used by companies as loyalty points, incentive rewards, gig-economy, or remittance payments or more. CBDCs – central bank backed digital currencies –are fast being trialled and put into use. At best these save on the printing, energy use and potential fraud that comes with physical money and bring efficiency. More realistically, they will give governments and their issuers around the world a Black Mirror-esque level of power and control over citizens, as we are already seeing being trialled in some places.
Challenging finance in its current form
There are some other areas in crypto that are still waiting for their big breakthroughs:
- Saving
- Lending
- Trading stocks
Crypto banking and savings accounts are growing in popularity, offering users high interest returns on their holdings. Some crypto banks are popping up, now jointly counting their users in the millions, and having billions in secured assets. These crypto bank offerings – including the likes of Celsius and Nexo – offer vastly higher interest rates than available by traditional banks. There is also now crypto lending and borrowing, a space that is growing fast, largely as they offer, in some cases, the same interest pay outs one might get in a traditional savings bank in a year, within days.
When it comes to lending and borrowing, both Celsius and Nexo offer it and are the biggest centralised companies to do so. However, there’s also an unregulated DeFi world that is bursting with multi-billion-dollar companies that offer better rates of return or lower payback fees. Compound, Aave, Oasis, Fulcrum, and Venus are some of the offerings here. With banking, lending, and borrowing all becoming so popular, cryptocurrency exchanges are getting in on the act, with Binance, Coinbase, and KuCoin each embracing these financial products.
Are crypto savings accounts and lending and borrowing of crypto assets revolutionising industry? On their own, probably not. But they are showing what can be done and there is now the potential for all and any digital assets – including NFTs as well as tokenised anything – to be stored and borrowed and loaned in the same way, offering greater accessibility and liquidity to a whole new range of assets.
It’s getting competitive to disrupt traditional finance beyond just spending, and traditional finance has the infrastructure and good systems needed already in place. The likes of crypto lending, in its current form, requires heavy collateralisation and is a little bit (can be very) complicated and is far from being risk-free. In time, as user interfaces improve, this market will become just as normal as any other loan industry.
Which industries is crypto most likely to affect?
Cross-border payments are being disrupted and it’s hopeful that this will eventually put the most extortionate remittance companies out of business, or at least make them considerably lower the exorbitant fees they charge to the world’s poorest. The loan industry is seeing DeFi lending moving in, but this is still evolving. It’s one solution for those who want to hold cryptocurrencies long term whilst freeing up some capital. As payment gateways improve and infrastructure excels, expect to see the retail industry change to accept more cryptocurrencies, especially stablecoins, as payment. I expect crypto to be increasingly used in loyalty rewards, incentives and in paying per use for content models. We are also seeing cryptocurrency be used in micro-loans and micro-insurance, as it is so much cheaper to transfer digital currency to digital wallets to people all around the world than transport physical cash to those who don’t have bank accounts.
Changing the lives of migrant workers
What cryptocurrencies and blockchain technology can do – and are starting to do – is to change the fortunes of those with very little money, as they are often the ones who suffer most. They are the ones who are the most likely to suffer overdraft charges, late fees, extortionate payday loan terms, and massive transaction costs. It’s certainly the case for remittance services, essentially businesses that facilitate cross-border payments for migrant workers, which charge an average of 7% per transaction but up to 30%.
It’s thought that there are around 250 million migrant workers globally, sending around £400-500bn per year back home. If around £50bn of that is being lost in transaction fees, that shows there’s enormous potential here for a solution to replace these high fees. M-Pesa in Kenya, not a cryptocurrency, but a way of sending value digitally, is one such example, with national take-up of around 80% due to just having an easier and cheaper way of making digital payments.
Beating hyperinflation with cryptocurrencies
Venezuelans are in the middle of a hyperinflation crisis, which means that currently (and only for the brief moment at the time of writing, as it changes momentarily) $1USD is roughly thought to be equivalent to 400 billion Bolivars, though there isn’t an official conversion rate. Multiple zeros get added or taken away too frequently to track. Many in Venezuela have, out of need, turned to crypto, primarily Bitcoin, as an alternative, with overseas relatives helping them, and those who managed to make the conversion early avoiding seeing their savings turn to dust.
In El Salvador, the government just made Bitcoin a legal tender. It’s a world first. It’s the first place where Bitcoin has just become legal/ usable/ regular money. With this, we can see that governments and their people are _ in some places at least_ starting to think alike, seeing that there are mutually beneficial reasons to embrace cryptocurrency as the way to supersede existing and outdated financial infrastructure.
Crypto Wars: Faked Deaths, Missing Billions and Industry Disruption by Erica Stanford is published by Kogan Page, available online and from all good bookshops.
