A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. To use cryptocurrencies, you need a cryptocurrency wallet.
1. Cryptocurrencies: What the
future holds for crypto
In countries that have recently suffered from financial disasters and currency
collapses, such as Turkey, Lebanon, and Venezuela, citizens have turned to
cryptocurrencies . After being forced to use a dead-end store of value or currency,
the public in these countries eventually seemed more inclined to turn to
cryptocurrencies as a "safe haven".
A social change whereby cryptocurrencies will be used as a common medium of
exchange may still be a long way off. But institutions and regulators have already
begun to soften their stance on the use and proliferation of digital assets.
In July, the case of United States v. Harmon forced the federal courts to make an
important statement about money. Chief Justice Beryl A. Howell stated that
money “ordinarily means a medium of exchange, a method of payment, or a store
of value. Bitcoin is all of that.”
However, every day we see more and more businesses turning to crypto and other
blockchain solutions. Even large payment processing companies like Visa are
increasingly interested in offering crypto services to their customers .
As both the public and the traditional tech sector become more aware of what
blockchain can do, the development work will grow exponentially. And as we
become more comfortable with using cryptocurrencies, we will also see a steady
increase in their use in everyday life, further reinforcing the statement of Cameron
Winklevoss, the well-known Bitcoin billionaire and co-founder of Gemini
cryptocurrency, that cryptocurrencies are not only emerging forms currency, but
perfect examples of organic technological and economic development. In
essence, that Crypto is money.
The legal status of crypto (ie, whether or not it is "property") matters, as it will affect
the legal action that can be taken if the cryptocurrency is misused.
To qualify as "property" an asset must: 1) be identified, 2) be recognized by third
parties, 3) be capable by its nature of being assumed by third parties, and 4) have
some degree of permanence.
2. It is a fact that more countries have “opened their doors” to cryptocurrencies this
year than we have seen in previous years. As the demand for cryptocurrencies
continues to grow, countries in Asia and Africa have begun to create and adopt
lighter regulatory policies.
The European Union, a political and economic body made up of 27 member states,
has become the newest organization to adapt new guidelines for the regulation of
digital currencies.
In a leaked 167-page draft, the regulatory guidelines outline policies to control
market volatility for Bitcoin and other cryptocurrencies, including stablecoins, by
creating a "new college of supervisors" involving existing national and continental
regulatory agencies. and a new additional body – all chaired by the European
Banking Authority (EBA).
The implementation of the bill could mean that the European Union is making
external moves to facilitate the adoption of cryptocurrencies in the future. This will
give the EU the first jurisdiction to regulate digital currencies.
The legislation will be linked to the level of risk inherent in each crypto asset, with
stricter requirements on issues such as oversight and obligations applied to what
it calls "significant electronic money tokens".
"In 2015 we realized that there is no risk free activity"
Bitcoin and Libra are the top priorities
According to Euractiv, a traditional European media outlet, the European
Commission's draft crypto law will focus on many different cryptocurrencies,
including both "systemic" and "popular" digital currencies.
Stablecoins, a type of cryptocurrency tied to conventional assets, were on
policymakers' agendas last year when Facebook unveiled plans for the digital
currency, which the European Union had initially labeled a high-risk stablecoin.
The Libra link should become a credit institution or an electronic money institution
under the supervision of the EBA, with the help of national bodies. At the same
time, Bitcoin will also be subject to the proposed regulatory policies.
3. With member states such as Germany, France and Malta already creating their
own tailored rules, which will ensure investor and customer rights are protected
while acting as a watchdog against market manipulation, the draft law will take
effect in the coming weeks.
The controversial relationship between Libra and the European Union
News of the EU's plans to regulate digital currencies was first reported in June,
when Valdis Dombrovskis, vice-president of the Commission for Financial
Services, noted that Europe as a continent is well-equipped to lead the way in
Crypto -regulations.
Before that, finance ministers had collectively agreed in 2019 that private
currencies like Libra would not be welcome in Europe until their risk factors were
thoroughly studied.
Libra has played the EU on its toes since the announcement of its launch by its
parent company Facebook in 2019, which warranted a hostile reception from the
EU. With Facebook already serving 2.7 billion .monthly users, central banks and
financial regulators fear that Libra could destabilize monetary policy, facilitate
money laundering, limit user privacy and ultimately further affect the country's
financial stability. The stablecoin will be backed by central bank-issued currencies
such as the US dollar and government debt.
Recently, Germany, France, Italy, Spain and the Netherlands said that “stablecoins
should not be allowed to be used in the European Union until legal, regulatory and
supervisory challenges are addressed,” according to Reuters.
According to the Commission's proposal, digital asset developers would have to
issue a "white paper" detailing information about the issuer, token or trading
platform "to enable potential buyers to make an informed purchase decision and
understand the risks associated with the offering."
All these documents must then be approved by national and European regulatory
authorities before issuers can start operating. According to the draft text, the EBA
will have the power to investigate, carry out on-site inspections and impose fines
equivalent to 5% of the crypto company's annual revenue "or twice the amount or
profits gained or losses avoided of these systemic cryptocurrencies thanks to the
breach.”
4. The Commission's proposal, which comes two years after its first dissent, will be
released sometime this year, Euractiv reported. Later, it was revealed that the EU
Commission has launched plans to create a digital currency with the support of
the European Central Bank.
Despite the difficult relationship between the EU and Libra, the inclusion of Libra
in the regulatory proposal is an undeniable advance, which could pave the way for
the controversial stablecoin, which still has many regulatory battles to fight in
many other countries.
Issuing a legal framework for crypto in Europe may not be as important when the
guidelines are not long-term and favorable. However, it is certainly the first step
towards widespread adoption in Europe as a whole.
With the guidelines in place, crypto businesses and users in all member states can
continue their business with ease. It is therefore evident that the future of crypto
in Europe is very promising.
Systemic banks
Big banks have shown little interest in crypto to date. In part, this is due to their
general aversion to high levels of risk and an institutionalized culture unsuited to
digital change and innovation. There is also a legitimate fear of being judged illegal
by financial regulators.
There are, for example, concerns about money laundering – criminal networks are
known to transfer funds through cryptocurrencies. There is also the question of
how a major bank will protect its existing customers from the extreme volatility
associated with crypto prices today.
Alongside the regulatory minefield, there are issues related to technology
infrastructure. Right now, most of the big banks don't have the systems in place to
effectively compete with the first crypto companies.
Barclays is one of the few major banks to explore this area through a partnership
with San Francisco-based Coinbase, which has allowed users to buy
cryptocurrencies with sterling and withdraw their money. But that relationship
ended quietly in August 2019.
5. The challenges explain why investment banks tend to be more adventurous than
retail banks. JP Morgan was the first established banking brand to launch crypto:
The JPM Coin.
A key point to emphasize is that the value of the JPM coin is directly tied to the US
dollar, a model referred to as a “stablecoin”. This differs from more well-known
cryptocurrencies such as Bitcoin, which has value based on supply and demand
and is therefore more susceptible to volatility. Unlike existing stablecoins, where
the cash reserves backing them are often disputed, JPM Coin will be directly linked
to money in JP Morgan accounts, and the Coin will primarily serve as a means of
transferring funds between accounts using blockchain.
Initiatives such as JPM Coin are likely to play a key role in legitimizing the concept
of cryptocurrencies, as its link to a fiat currency means it is less volatile than
Bitcoin but also inspires more trust than an abstract currency because it is tied to
controls and balances of a real economy.
New banks
Challenger banks have established themselves as the innovators of the banking
industry, so they are culturally equipped to adopt new-complex technologies. At
the same time, market leaders have created brands that are trusted by large
segments of the population. So, in theory, they are the perfect bridge between
Crypto and Fiat banks.
The biggest of the new banks that have sought a competitive advantage through
Crypto is Revolut, which, in 2017, allowed some of its users to complete
transactions in currencies such as Bitcoin, Litecoin and Ether.
Others that have explored the crypto 'arena' include Germany's Bitwala, which
allows users to buy, hold and earn interest in Bitcoin, thanks to a partnership with
crypto platform Celsius Network.
GAFA (Google, Apple, Facebook, Amazon)
The desire to grow their ecosystem by increasing the services they offer to
customers is a key reason for tech giants to get involved in financial services, and
cryptocurrencies are now on their agenda. Apple confirmed its interest in 2019,
6. while Amazon has established blockchain patents that allow it to expand into
crypto.
The fact that GAFAs are cash rich and have huge user bases seems to make them
a contender for the top spot in the crypto space, but there are obstacles in their
way.
Digital banks (neo banks )
A significant subset of this market are second-wave challenger banks, which have
had crypto ecosystem offerings in their businesses since launch. Examples
include the Swiss bank SEBA, which acts as a progressive technological bridge
between the traditional and crypto worlds.
Also active is UK-based digital payment platform Wirex, which allows customers
to buy, sell, exchange and make payments in cryptocurrencies. Additionally, they
offer the Wirex Visa, a multi-currency card, which enables users to seamlessly
spend crypto anywhere Visa is accepted.
Of interest to this subset of companies is how the best are prioritizing the
customer experience, adopting the best practices of challenged retail banks. Early
indications are that new banks that focus on narrow customer segments or
7. "shallow" bank markets will find themselves in a strong position. This contrasts
with the situation in retail banks, which challenged the first wave, which instead
worked hard to gain a foothold in the mass market.
It is noteworthy that some important experiences in this area come from the first
wave of challengers.
Mark Hipperson, who was the head of technology at Barclays and co-founded the
"controversial" bank Starling, recently launched a new crypto-enabled platform
called Ziglu.
There are no two ways about it. We are at a critical moment for crypto banking,
with key players taking the lead in shaping its future direction, but so far without
any clarity on who will make the first move to lead by example.
What happens next – especially if the established banking system can adapt to
adopt a more distributed ledger approach to monetary systems – and how
regulators respond is the key.
It is a “landscape” in which money and the digital systems around it merge
effectively, resulting in the emergence of faster, more comprehensive and more
dynamic global monetary banking systems.
Exchanges
It makes sense that cryptocurrency exchanges would be strongly motivated to
take advantage of the narrowing gap between crypto and fiat because they have
first mover advantage. Having already built up huge cash reserves and customer
bases for potential use in crypto, it would be relatively simple, technically, for them
to add to banking services.
They will no doubt come under close regulatory scrutiny because of concern about
their role in fueling the shadow economy. Assuming they can overcome this hurdle,
repayment will result in greater legitimacy in the banking market.
8. Several exchanges, including Celsius, have already introduced key extras such as
high interest rates for investments and tax services. Binance, the world's largest
exchange by volume, also recently introduced the Binance Card, a debit card it says
will be accepted by more than 46 million merchants in 200 regions and territories.
The bottom line is that the playbook on how to build a digital bank is readily
available if crypto exchanges are able to mitigate regulatory concerns.
Cryptocurrency Custody
Cryptocurrency escrow solutions are independent storage and security systems,
used to hold large amounts of tokens. Custodial solutions are one of the latest
innovations to emerge from the crypto ecosystem and are expected to herald the
entry of institutional capital into the industry.
At this point, a short basic question arises: why does Crypto need custody
solutions and what types of custody solutions are offered in the market? Simply
put, cryptocurrency escrow solutions are third-party providers of storage and
security services for cryptocurrencies. Their services are mainly aimed at
institutional investors, such as hedge funds, who hold large amounts of Bitcoin or
other cryptocurrencies.
Solutions generally incorporate a combination of Internet-connected hot content
storage or encryption and Internet-disconnected cold storage or encryption.
9. Both types of storage have advantages and disadvantages. For example, hot
storage is connected to the Internet and therefore offers easier liquidity. However,
storage options may be vulnerable to breaches due to online exposure.
Cold storage solutions offer greater security. However, it can be difficult to
generate liquidity from crypto companies in a short period of time due to their
offline nature.
Vault storage is a combination of both types of cryptocurrency storage solutions,
whereby the majority of funds are stored offline and can only be accessed with a
private key.
Why does Crypto need custody solutions?
The primary utility of cryptocurrency custody solutions lies in the safekeeping of
crypto assets. Private keys , which are used to conduct transactions or access
encryption, are a complex combination of alphanumerics.
They are extremely difficult to recover and can be stolen or hacked. Online wallets
are a potential solution, but they have also proven vulnerable to hacks. The same
goes for cryptocurrency exchanges.
Other solutions include storing private keys offline on paper or on a hard drive (or
other electronic equipment) that is not connected to the Internet. But loss of
physical custody (either paper or electronic equipment) is very likely to happen,
and in these cases recovery of cryptocurrencies may be impossible.
For individual Bitcoin holders the possibility of losing private keys is a risk for
institutional investors, but it represents an even more significant risk, which the
latter do their best to protect against. Also, some large investors have been known
to distribute parts of a portfolio across multiple storage units in different locations.
The other important reason for having encryption solutions is regulation. Under
SEC regulation, issued as part of the Dodd Frank Act, institutional investors who
have client assets worth more than $150,000 are required to store holdings with a
"specialized custodian."
10. The SEC's definition of such entities includes banks and savings banks and
registered broker-dealers. Futures traders and foreign financial institutions are
also included in this definition.
In the crypto ecosystem very few mainstream banks offer custody services.
Kingdom Trust , a Kentucky-based custodian, was the largest such service for
cryptocurrencies until it was bought by BitGo, a San Francisco-based startup.
Cryptocurrency custody solutions have grown in popularity as analysts and
institutional investors increasingly see them as a bridge between the traditional
institutional investment market and the changing crypto space.
At least two developments are expected to affect the future of crypto:
● The first is the entry of major players. Established names such as
Goldman Sachs ( GS ) are conspicuously absent from the list of names
offering crypto solutions. Their entry could shake up the "newborn"
market. But several large financial institutions, including Nomura
Holdings Inc, hope that traditional assets such as bonds or stocks can be
digitized and issued using blockchain technology to reduce costs and
simplify some processes. On the other hand, investment manager Fidelity
and exchange group Intercontinental Exchange Inc are leading the way in
offering protection or designing crypto services.
● The second development is the clarity of the settings. Security provisions
regarding the storage of cryptocurrencies are absent from the current
regulation. Not only that – businesses are still unclear about the
regulations surrounding cryptocurrencies themselves. The industry will
only evolve after regulators come in and competition rules are in place.