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Could Digital Currency Just be Getting Started?

Could Digital Currency Just be Getting Started?

It seems increased regulation may be the exact thing that traditional finance has been waiting for to see this finally mature as an asset class, writes Rupert Carlyon.

2 October 2023

It came from the outer reaches of the tech sector to land on the front pages of Bloomberg and Forbes. On its way it made a handful of institutional investors and a multitude of armchair stock pickers a fortune and then, unfortunately, lost many trend followers even more.

I am talking, of course, about cryptocurrency, the bogeyman or the saviour of modern finance, depending on who you ask. But despite all the hurrah around the digital asset class, could crypto just be getting started?

On its deathbed, not quite …

At the end of 2022, following the spectacular collapse of FTX, Bitcoin fell in value from its heights of US$64,000 to depths of US$16,000, most in the finance industry (and media) thought crypto had finally been killed off.

And following the dive of FTX in November 2022, regulators and lawmakers in the United States have rightly increased their scrutiny on the crypto industry.

This has led some crypto leaders to cry foul, claiming regulation would kill their industries and business models. But increased regulatory focus has done the opposite; over the past month the price of Bitcoin has hovered around $30,000, almost double its November lows.

It appears traditional finance has spent the past 12 months of the crypto winter building out new products and custody solutions to attract a whole new investor during the next uptick. This is evidenced by global behemoths like Nasdaq, BlackRock, Fidelity and Anchorage announcing new crypto products recently.

It seems that increased regulation may be the exact thing that traditional finance has been waiting for to see crypto finally mature as an asset class.

How is regulation changing the game?

Crypto has coasted along for some time free from regulation, but this may be the exact thing that has kept it from maturing into the asset it always promised it could be.

At its heart cryptocurrency is a technological offering; a decentralised system that moves quickly and operates without traditional borders.

For much of its life the only companies exploring the applications of crypto have done so almost completely unregulated. Any hint of regulation led to exchanges moving into more “regulatory friendly environments” or swathes of well-paid lawyers called in to argue that crypto currencies are not actually financial securities.

This has led to the catastrophe of FTX, but also a myriad of other issues the US Securities and Exchange Commission are now attempting to clean up.

US SEC chairman Gary Gensler says many crypto exchange companies made “calculated decisions” to flout the rules. In his view, most crypto tokens meet the test for being a security and so should be registered with the SEC, which also means most crypto exchanges have to comply with securities laws.

The regulator has moved to sue two of the largest exchanges, Coinbase and Binance, on this very issue.

Anyone upset at this situation is just not paying attention. If you want to hail crypto as a game-changing asset, you can’t just pick and choose which rules you want to follow and ignore the rest.

Rather than scare off investors, the increased regulatory scrutiny has encouraged some of the biggest investors in the world that cryptocurrency warrants being taken seriously.

The world’s largest asset manager, BlackRock, has this month filed to list a bitcoin ETF with the US SEC. The price of Bitcoin quickly shot up almost 15 per cent with the expectation that a new regulated product from the world’s largest fund manager would drive more demand and push prices higher.

The BlackRock bitcoin ETF is a huge about-face from the global asset manager, which in 2019 warned that only investors prepared for “complete losses” should touch cryptocurrency.

But now, by throwing its leviathan weight behind crypto, it has changed the game for everyone, and increased Bitcoin price on its way through.

Where to from here?

The only thing that has changed is now the regulators have been forced to come to the party and figure out a way to bring crypto under their remit.

It is regulation that has most probably inspired BlackRock, and it should inspire others to take another look at crypto, because under the auspices of the US SEC we may see the wheat cut from the chaff, the cowboys separated from the serious investors.

We may also finally get to see what this crypto thing can really do. Regulation has made the world’s largest asset manager take crypto seriously, but where will it be heading next?

In all the talk about the price fluctuations of crypto assets many forget that what we are talking about is a finite asset, especially for crypto mastheads such as Bitcoin.

When BlackRock, and the other large-scale industry players that will follow in their wake, put their weight behind crypto, it may cause a rush on the asset class. This could cause a liquidity squeeze, raising the price of the asset to heights we have not yet seen as institutional players and armchair investors try to get in on the action.

This will inevitably favour people who have already been invested in the asset and may drive naysayers to point to crypto as overly-hyped.

But this time, with the power of large investors behind it, combined with the strength of proper regulation for the first time, there might be some staying power behind the price rise. Unlike previous price hikes, this one could be followed by less volatility.

The shape of payments, finance

Another aspect I am personally excited to see is the technological implications of cryptocurrency. While it has been an investment on the outskirts, we have had no opportunity to see what this technology can do in terms of changing the shape of payments and finance.

But if this asset class is embraced by mainstream investors, and is properly regulated as the securities they clearly are, then it will finally have the freedom and backing to achieve its technological promise.

By eliminating intermediaries through peer-to-peer transactions, cryptocurrencies could significantly reduce costs and enhance efficiency. This threatens established banking systems, necessitating their adaptation or risk of obsolescence.

The borderless nature of cryptocurrencies enables financial inclusion on an unprecedented scale. Previously excluded individuals can now participate in global financial markets with minimal barriers, fostering economic growth and empowering marginalised populations.

Of course, all this potential remains to be seen. But it finally feels like pro-crypto enthusiasts can stop watching the markets through their fingers in fear and can start looking towards the future with a bit of optimism.

This article is intended for information purposes only and reflects the opinions of the author. Investing in cryptocurrencies carries a significant amount of risk; you have the potential to lose all of the capital invested. Make sure you do your research and seek financial advice before investing.

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