Is cryptocurrency primed for the big time?
Eighteen months ago, cryptocurrency hit the mainstream, dominating headlines off the back of the sky-rocketing value of Bitcoin, which topped out at almost $20,000. At its height, there were fanciful predictions that the value of the decentralised digital currency could hit $100,000.
Everyone knows what happened next: rather than continuing its ascent, Bitcoin plateaued before falling sharply, and at time of press sits at a shade over $3,950. Current Harvard University Professor of Economics and Public Policy Kenneth Rogoff has said that in the long-term, the value of Bitcoin is more likely to be $100 than $100,000. Against that backdrop, you might think that cryptocurrency has had its day, destined for the very fringes of the payments industry.
But you’d be wrong; in fact, the sector is set to expand rapidly, with the cryptocurrency market predicted to grow from $574.3 million in 2017 to just over $6.7 billion in 2025, at a CAGR of 31.3%, according to Transparency Market Research, 2019. And some of the world’s biggest enterprises are taking notice.
But what is likely to drive such growth in the crypto market? “As confidence in the crypto asset market grows, we can expect to see more institutional investors enter the space. Crypto assets are now seen more as a store of value than a payment method, which has had a great impact on their value,” says Erik Wilgenhof Plante, CCO at cryptocurrency exchange BeQuant.
“The key driver for further expansion and growth of the market will be in its regulation, which is starting to make some headway but is yet to achieve widespread adoption. Once larger jurisdictions such as the US, UK and Asia start to take cryptocurrency more seriously, we will see the market move closer to a regulated state, and further industry growth will follow.”
Speaking to Digital Bulletin, Dan Howitt, MD and founder of Recap, which develops accountancy software for cryptocurrency platforms, comments: “We believe that remittance will be a key driver. At the moment, you can send ‘value’ to anyone globally almost instantly. Bitcoin, by its very nature, is not constrained by borders and people are really starting to realise its use case as a cost-reducing remittance mechanism.
“Payments will also be a driver, as many have pointed to. Innovations of scaling the transaction capabilities of cryptocurrencies are heading mainstream. The lightning network for Bitcoin is highly anticipated to enable payment processing of Bitcoin at low cost, which is geared for making small or microtransactions. This, in turn, will normalise the use of cryptocurrency in day-to-day payments.”
What is also likely to normalise cryptocurrency is the introduction of leading enterprises into the sector. While unconfirmed, there have been a number of reports that Facebook is developing its own cryptocurrency for payments, although the social media giant has said that it is taking a strong interest in blockchain and is currently advertising for a Lead Commercial Counsel to “support its new initiative in the development of blockchain applications”.
Addressing the possibility of Facebook and other powerful enterprises moving into the crypto space, Plante draws parallels with the initial development of the internet, saying: “This is very similar to the early days of the internet, when rivals like America Online tried to get involved in a burgeoning sector.
“Facebook’s investment and development of its own cryptocurrency demonstrates an interest in the transactional capabilities of the asset. Unless Facebook approaches crypto as a universal payment method, this could fracture the market.
“The main selling point of Bitcoin, for instance, is the fact that it is user agnostic and not dependent on an issuer. The large user base of Facebook will probably cause those that are crypto-curious to start engaging with the asset and eventually transition onto more generic coins.”
He adds that companies and individuals thinking about breaking into the cryptocurrency market should look to take advantage of the current interest in the sector.
“There is a great opportunity. The crypto market has a very low entrance cost but with huge potential. Again, this is very similar to the dot.com era when thousands of entrepreneurs saw the successes made by others and followed suit by starting a website. My advice to entrepreneurs wishing to take advantage of the current landscape would be to get a coin to market before investment interest fades. That said, tokenisation as a concept is here to stay, and this is where the real value underlying cryptocurrency lies.”
Howitt says he has doubts over whether a Facebook crypto would be a “true cryptocurrency”, questioning what it would have to gain from releasing a decentralised currency to the world.
“If they have centralised features and controls, this would not be a cryptocurrency in the sense of Bitcoin and Ethereum, which are decentralised. If they do indeed have centralised features, I’d imagine this would make the currency fall under the regulatory spotlight of most jurisdictions. By getting decentralised, they might get around the more restrictive regulations.
“Overall, this would be interesting in terms of a ripple effect of awareness and trust for the rest of the cryptocurrencies out there. It could well act as an onboarding for billions of users into the cryptocurrency market.”
Gert Sylvest, co-founder Tradeshift and GM Tradeshift Frontiers, agrees that an entrant such as Facebook could be a catalyst for large-scale adoption, but warns that the company would have a number of potential roadblocks to consider.
“We are still very far from mass adoption of cryptocurrencies, both for businesses and consumers. It is clear that the leading social networks could play a pivotal role in launching cryptocurrency that is adapted for use in a mass market, although exactly which form it would take is harder to predict,” he says.
“Cryptocurrencies are mostly not accepted as legal tender anywhere. That means it will be the programmability of the coin – e.g. the ability to make programmable transfers or remittances – that could make this something else than ‘yet another payment option’. Facebook will have its work cut out here to balance privacy, openness, compliance and business models.”
A move by a company such as Facebook or other messaging services into the cryptocurrency market would likely be met enthusiastically by investors. Telegram recently raised $1.7 billion for its new cryptocurrency/token.
“The one thing messaging enterprises have is users and fantastic user experience – if there is a mechanism to exchange value, users will take to it,” says Howitt.
“There will definitely by appetite,” adds Plante, “even if the tokens are limited to those companies, they have a huge user base to draw from. It will become even more interesting if media companies like YouTube and Spotify start using tokens to reward content creators. This will take away a lot of friction and lower the cost of entry for starting musicians and vlog creators and will make the crypto market even more accessible.”
As well as the potential for enterprise offerings, Sylvest says observers can expect to see a number of trends developing over the reminder of the year in the cryptocurrency market.
“I see the growth trajectory continuing to accelerate across algorithmic and commodity-backed stablecoin formats, and we’ll also see more high-volume stories start to emerge in the B2B world. Most likely these projects will centre around financial protection and supply chain finance.
“In addition, I think the incumbents will push more forcefully for regulation of the crypto space. Meanwhile businesses interested in the space will be on the lookout for ‘complete players’ who can deal with all the various different aspects – applications, standards, integrations, network, operations – required to take B2B pilots from ‘kitchen sink’ stage to scale.”
Plante believes that we will see more robust regulation over the next 12 months, as well as an increase in public trust and a further influx of institutional and professional investors into the market. But he warns that traditional organisations must change their position on cryptocurrencies and accept their place in the modern world of finance.
“Banks and regulated payment institutions need to get over their fear of crypto and stop rejecting professional crypto companies,” he says.
“Traditional banking offerings are still critical for the development of the crypto industry, but at this moment it is almost impossible to get even a simple current account at a major bank. This drives even the large crypto companies to second and third tier banks, often in less desirable jurisdictions.
“What we see as a result is a vicious circle of negativity surrounding crypto. Banks could learn a lot from the innovation in Regtech and crypto compliance, and, just like they once feared the internet and now embrace it, then feared the cloud (and now embrace it), they should realise that crypto is here to stay.”