Cryptocurrencies and digital assets have advanced in the past decade
from Bitcoin’s nascence to myriad digital currencies and tokens,
potentially backed by a wide range of real-world assets and other
blockchain-based platforms. These rapidly developing technologies
represent novel investments in their own right, such as Bitcoin, the
native crypto asset to the Bitcoin network, and Ethereum, the
network behind its native crypto asset of the same name. They also
represent unprecedented ways to pay for goods and services and
provide platforms for applications without centralized systems.
Examples include non-fungible tokens (NFTs), a new class of digital
assets that allow for various representations of ownership, and
decentralized finance (DeFi) platforms, designed to reconceptualize
how we think about and manage money and all that finances can
facilitate.
No matter how you feel about them, these technologies are not going
away soon, and understanding their future evolution and impact is
critical as they continue to transform financial systems and entire
industries. The world of cryptocurrency and other digital assets
promises significant innovation ahead and continued rapid and
widespread adoption. The regulatory scene will also be fascinating
to watch.
In 2009, an individual or group of individuals calling itself
Satoshi Nakamoto came up with the first digital currency, Bitcoin.
This currency was designed to operate without a central authority,
using a structure known as the blockchain, designed to conduct
transactions in a secure, verifiable, and transparent. Bitcoin was a
nerdier passion for cryptographers and tech enthusiasts for nearly a
decade. However, it really came into the mainstream consciousness in
2014 after the Bitcoin exchange Mt Gox hack, not least because it
brought to light the fact that the investment landscape in this
field was riven with risks along with much of the potential.
In the aftermath, altcoins – alternative cryptocurrencies or digital
currencies – began to increase. In 2015, the creation of Ethereum by
Vitalik Buterin was widely regarded as a turning point in the
history of digital currencies and the beginning of a new era for the
blockchain. Compared with Bitcoin, Ethereum is more dynamic and
flexible. One key innovation is intelligent contracts, whose terms
are stated and stored in code. Smart contracts and their application
to decentralized applications (dApps) and Decentralised Finance
(DeFi) have opened the door to a new generation of blockchain-based
services beyond mere peer-to-peer payments. Notable examples of
altcoins include Litecoin, Ripple (XRP), and Cardano.
The evolution of cryptocurrency over the past decade includes the
2017 initial coin offering (ICO) boom – with companies and
entrepreneurs funding groundbreaking blockchain projects by selling
assets to investors, sometimes with disastrous consequences – and
the subsequent boom of decentralized finance (DeFi) platforms
unleashed in 2020, which have disrupted the financial world by
offering all sorts of peer-to-peer (p2p) lending, borrowing, and
trading services between two parties without any kind of
intermediary. More recently, the revolution of what has become the
latest fad in cryptocurrency – non-fungible tokens or NFTs – has
shown that digital assets need no longer be transferable like money.
It is amazing to witness these milestones unleashing a new world of
possibilities for a technology that is still evolving as we speak.
Blockchain technology, the foundational innovation behind
cryptocurrencies, has significantly evolved from its humble
beginnings in 2008 with the launch of Bitcoin. Back then, its
purpose was to support peer-to-peer cryptocurrency transactions. It
is being applied in various contexts where intermediaries can be
further reduced. Blockchain is a distributed ledger technology
recording transactions on a network of independent computers. Each
computer in the network stores identical transaction information.
This way, duplication of effort is avoided while making the process
secure and transparent, and providing finality (immutability) since
no single party controls the data. Given the trust nature of any
transaction, the reduction of intermediaries improves performance
reliability and reduces the cost of any transaction. The technology
has evolved in terms of enhanced capabilities, or rather
technological improvements in the underpinning protocols by which
transactions are later recorded into a block or a group of blocks,
forming the distributed decentralized ledger of immutable
transactions.
Notable innovations include smart contracts, decentralized finance
(DeFi), and non-fungible tokens (NFTs). A smart contract is a
contract between two or more persons, with the terms of the
agreement written into the code, that executes automatically when
certain conditions are met. This automated execution is
decentralized and trustless – as the transaction (contract) is
secured on the blockchain, intermediaries are replaced and cut,
saving transactional costs for the parties involved. DeFi
(‘decentralized finance’) is a blockchain-based, open financial
system that provides access to financial services such as lending or
borrowing through smart contracts, with financial intermediaries no
longer being required. As seen with Ethereum, smart contracts
enhance the realm of possibilities for the type of applications we
can create, such as creating new electronic money systems, including
decentralized digital currencies, but also financial instruments
like trade futures, which can be executed automatically on a
decentralized peer-to-peer network, supported by self-enforcing
smart contracts.
New and emerging technologies, such as artificial intelligence (AI)
and the Internet of Things (IoT), are already converging with
cryptocurrency, and blockchain can lead to further efficiency
improvements and new use cases. AI could strengthen blockchain
analytics and anomaly detection to improve blockchain security and
could also be used to improve cryptocurrency trading strategies. IoT
blockchain integration could lead to better data sharing and
tracking securely and transparently in supply chains, telemedicine
applications, and smart cities. Adopting these highly disruptive
technologies could enable innovations in cryptocurrencies'
infrastructure, efficiency, and usability over the coming years.
Regulatory regimes for cryptocurrencies and digital assets are
nuanced and vary widely across jurisdictions. In certain nations,
such as the United States, federal regulatory bodies, which include
the Securities and Exchange Commission (SEC), the Commodity Futures
Trading Commission and the Financial Crimes Enforcement Network
(FinCEN), recognise crypto to varying degrees, sometimes deeming
some cryptocurrencies as securities and overseeing the market
through regulation. In the US, certain digital tokens have even been
treated as commodities. Between February 2017 and May 2019, FinCEN
charged Coinbase, one of San Francisco’s largest crypto exchanges,
with separate anti-money laundering (AML) and know-your-customer
(KYC) violations. This stand with regulation has been matched by the
SEC and the CFTC, raising the bar for comments on market regulation.
Regulatory changes loom ominously on the horizon. Predicting the
counterfactual is impossible, but it seems fair to say that as the
market matures and integrates further into the wider financial
ecosystem, regulators will develop more comprehensive frameworks
that specifically address the peculiarities of digital assets. This
could include copies being defined as securities, greater scrutiny
of AML/KYC practices, and better consumer protections. The
development and launch of CBDC-ies by states worldwide could also
have a ripple effect on the regulatory frameworks of cryptocurrency
markets. It’s paramount for governments to have a say in monetary
policy and control over the integrity of the financial system. The
evolution of international standards, such as the
soon-to-be-legalised recommendations by the Financial Action Task
Force, will likely play a vital role in future regulatory
approaches.
The most important are the moves of governments and international
organizations. National governments make and enforce the regulations
that dictate how crypto can be used, traded, and taxed inside a
country and how that country will interact with fiat currency issued
by other countries. Their approach will range from welcoming to
dismantling and determine how the market grows and what gates it
will face in different parts of the world. On a global scale, crypto
is being discussed by the Fund (IMF) and the World Bank more than
ever, with the involvement of these entities expected to increase in
the coming years. The G20 has even committed to a coordinated
international approach to the regulatory challenges posed by digital
assets. As long as crypto continues to grow in importance, the
actions of these entities will play an even more significant role in
determining the evolution of the market, how much it integrates into
the existing financial system, and if it truly becomes a legitimized
asset.
Despite its promising potential, the cryptocurrency and digital asset landscape is fraught with several significant challenges and risks that need to be addressed for sustainable growth and wider adoption.
Security is one of the most important challenges. Given the value of cryptocurrencies and other digital assets and the fact that once a blockchain transaction is accepted, it cannot be undone, this is an obvious target. Further, exchange hacks such as the loss of nearly US$450 million of customers’ digital assets across the Mt. Gox and Coincheck exchanges in Japan in 2014 (equivalent to US$758 million in 2021 prices) made them more tempting. Smart contracts tokenize assets and represent them as fungible tokens on a blockchain that governs the asset redemption process – essentially an automated one activated when predefined conditions are met. The newer phenomenon, such as decentralized finance (DeFi) not getting enough attention until hackers have already compromised tokens, means more must be done here. However, it needs rock-solid security measures, continuous monitoring, and strict compliance with best practices in cryptographic security.
Given that prices on cryptocurrency markets can move several hundred percent up or down in a matter of days, it’s not surprising that market volatility is seen as a challenge. The reasons for volatility are multifaceted and include variations in market optimism, regulatory news, technological developments, and macroeconomic trends. Investors, of course, stand to make handsome gains as prices spike, but there is also the ever-present risk of heavy losses caused by slumps in prices. Market volatility also keeps even more institutions and ‘traditional’ financial institutions distant. Improving market stability concerning liquidity and regulatory clarity, as well as developing financial products such as futures and the so-called ‘options’ market, could help address this challenge.
Cryptocurrencies and digital assets' regulatory and ethical landscapes are challenging and still evolving. Regulators globally have struggled to classify these new forms of assets and develop appropriate regulatory regimes. A coordinated regulatory framework is necessary for those seeking to innovate for adoption more generally. Next, there are also ethical implications relating to its use for illicit activities such as money laundering, tax evasion, and the financing of other illegal activities. Cryptocurrencies are also used for AML and KYC (know your customer) purposes. So, there are downstream effects on users’ privacy, and many value these cryptocurrencies' pseudonymous nature.
Cryptocurrencies have the potential to significantly impact global financial systems and economies in several key areas, ranging from financial inclusion to international trade and beyond.
Just like the World Wide Web, blockchain technology enables a global network of nodes that communicate and propagate information rather than relying on intermediaries like banks and other financial institutions to transfer wealth. This has dramatic implications, not only for how money is used but for financial institutions’ losses of influence, with risks and rewards flowing more directly and transparently between lenders and borrowers. It could herald a world where financial institutions lose power to previously excluded individuals and businesses, becoming de facto market facilitators rather than gatekeepers. In this scenario, these businesses and customers would be empowered to participate freely in a global system and would no longer need to depend on them. The knock-on effect of such a decentralized infrastructure would be to drastically redistribute financial services and the global economy and compress or even dethrone centralized financial powers.
Perhaps the most encouraging aspect of crypto is its potential for financial inclusion, particularly for micro-lending, small businesses, and many more in the ‘unbanked’ or ‘underbanked’ world. That is, crypto could provide opportunities to many people, particularly those who live in places where banking services are merely unattractive and not restrictive enough to warrant government interference and where cash and banking services are simply inaccessible. As we have seen, mobile wallets and peer-to-peer transactions allow people to send and receive funds cheaply and instantly. No account is needed; all you need is a mobile phone. So, a few innovative organizations using blockchain technology for microlending, remittances, and access to capital are already showing how crypto could reduce poverty around the world.
Cryptocurrencies can usher in a new era of cross-border trade and finance by enabling speedier, cheaper, and more transparent transfer of funds internationally. A transfer of money from one country to another, especially for small- and medium-sized businesses and individuals, is typically slow, pricey, and complex when transacted through legacy banking systems. With a cryptocurrency, money can be swiftly transferred and cleared across borders, often at a lower cost and without converting one currency into another. This technology’s potential to facilitate the smooth flow of commerce, reduce friction for emerging markets, and enable faster money movement is hard to overstate. A blockchain-based cryptocurrency can further enhance supply chain transparency and efficiency by reducing the risks of fraud and ensuring that goods and services traded internationally are authentic and meet quality standards.
With many fundamental breakthroughs in technology and the number of use cases set to explode, cryptocurrencies and digital assets have tremendous potential and could revolutionize global finance and economies in the coming decades. From enhancing financial inclusion and speeding up international transactions to challenging existing financial systems, they could hold the key to a financially inclusive world. However, fulfilling this potential will require navigating many challenges, from securing regulatory clarity to market volatility and a complex global war on money laundering. With progress on all these fronts, which I am confident we will make, we could begin witnessing cryptocurrencies emerge as a force of positive disruption in economies, the new bottleneck of opportunity for innovation, economic empowerment, and financial sovereignty on a global scale.