The concept of cryptocurrency first emerged in the late 80s. The idea was to create a currency that could be sent untraceably and worked without the interference from centralised entities. After many years of wondering whether to invest in cryptocurrencies or not, the question is now about when to invest and how?
While the volatility of cryptocurrencies is both enticing and possibly devastating, the technology upon which they are all based, namely blockchain, has the potential to change many sectors of our society. Whether it's providing accessible and affordable financial exchange options, securing your own funds so no one but you can access them, or providing accurate data for your insurance quote, the blockchain technology can be used in almost all areas of our daily lives. As the market stabilises with improved knowledge and the introduction of concepts like stablecoins and decentralised finance (DeFi), it's easy to get excited about investments and technology’s potential, whether you're interested in Bitcoin or another blockchain project.
Blockchain and crypto, having established an international presence , shows that the blockchain has moved up a gear in its implementation within companies. Blockchain and crypto groundswell is driving companies globally.
In an earlier post, C-Innovation observed that crypto and blockchain accounted for the fastest growing sector for early- and late-stage funding in 2021. Also, the total M&A value involving companies offering cryptocurrency services exploded last year reaching almost 400 deals valued at $55Bn.
Industrialisation and profitability of projects, role of general management as the main sponsor, rise of crypto-assets in companies, plurality of blockchain solutions, or environmental issues are all topics analysed to invest in blockchain.
Globally, Banks are embracing cryptocurrencies
Faced with the rise of cryptocurrencies, and the interest of individuals and, more recently, of investors, the major banks are seeking to make their mark in this area.
The United States the most active market
American banks have a definite advantage, as the cryptocurrency ecosystem in the United States remains more developed and mature than in the European ecosystem. According to US giant Fidelity, around 80 million Americans own or have owned investments in digital currencies. By offering customers cryptocurrencies, big banks are allowing their customers to diversify their portfolios. For the past year, banking giants like Wells Fargo, JPMorgan Chase, Morgan Stanley and Goldman Sachs are among the firms with dedicated groups for cryptocurrency and its underlying blockchain technology. They have allowed their wealthy clients to be exposed to these assets.
In April, the famous American bank Goldman Sachs became the first bank to offer a secured loan in Bitcoin, which allows borrowers to use Bitcoin as collateral for a cash loan. It also became the first global bank in March to trade bitcoin options over-the-counter at Galaxy Digital, a crypto-focused asset manager. JPMorgan has one of the largest crypto teams, with more than 200 employees working in its Onyx division. The JPM Coin digital currency is being used commercially to send payments around the world. Wells Fargo & Co also began offering its wealthy clients cryptocurrency exposure in the summer of 2021, as did State Street. Citigroup Inc's wealth management unit created a digital assets group in June to facilitate investments in cryptocurrencies, stablecoins, non-fungible tokens and central bank digital currencies, according to media reports.
Similarly, faced with the rise of cryptocurrency trading platforms, and in particular FinTechs such as Robinhood and Revolut, American banks have decided to improve their trading services. Since March 2021, Golman Sachs has offered Bitcoin futures and non-deliverable futures, which allow clients to comment on the future price of Bitcoin. Two other American banks are well on their way to also offering this type of service; Bank of America and Citigroup.
Europe is still with a discrete dynamics
In Europe, crypto-driven initiatives remain more discreet, at a time when European institutions are considering regulating the cryptocurrency sector. It seems, at this point, that Germany has a head start. In late February, Germany's second-largest bank, Commerzbank, applied for a licence from the German regulator, allowing it to offer cryptocurrency exchange and custody services. If it were to obtain such a licence, it would become the first major German bank to embark on the adventure. 25 German banking establishments are planning to follow the same path.
In the case of Deutsche Bank, it is preparing to launch a cryptocurrency custody service. The announcement was made over a year ago, yet no official launch date has been issued. In the beginning of April, Portuguese bank Bison Bank became the first bank in the country to offer cryptocurrency-related services.
In France, the big banks remain cautious in terms of cryptocurrencies. If BNP Paribas or Société Générale forge partnerships in the blockchain and cryptocurrency sector, all remain on their guard. Banque Delubac & Cie became the first French bank, at the end of March, to obtain registration as a digital asset service provider (PSAN) with the AMF (French Financial Markets Authority).
Although Banque Delubac & Cie had announced that its offer would be available at the end of April, it seems to be delayed. The bank was expected to officially launch its services mid-May, including its buy-sell and cryptocurrency custody offerings, but nothing has been issued for now. At a later date, it will think about developing its online banking platform, with a product offer of broader tokens. The bank ensures that the offer will concern all customers, from individuals to institutions.
In Europe, Switzerland is an exception, with its attractive cryptocurrency tax system. Beginning of September 2021, the giant BBVA announced the launch of a cryptocurrency wallet. Axa Switzerland now accepts the payment of insurance premiums in bitcoin.
Portugal is also getting a lot of attention with its tax-free cryptocurrency regulations. Over the years, the country has announced many incentives, and now, cryptocurrency dealers and miners benefit from Portugal’s crypto-friendly climate. Bitcoin earnings are exempt from VAT in the country, and cryptocurrency enterprises are under fewer legal and regulatory hurdles than in other countries.
With its crypto-friendly position, Portugal offers a terrific example for other European countries. It encourages overseas entrepreneurs and investors by allowing them to earn cryptocurrencies without paying taxes on them.
FinTech players and cryptocurrency
FinTechs in particular are likely to be positively impacted by growth in cryptocurrency availability and adoption. A whole range of companies within the banking and FinTech industries are starting to explore ways through which they can take advantage of the electronic ledger technology that powers cryptocurrencies. Among the benefits of blockchain technology, that make it so attractive to FinTech companies and other large institutions, is the lowered risk of fraud since the technology is notoriously difficult to hack, its speed and the fact that it eliminates intermediary steps between parties in a transaction.
However, it is not just the technology that has wowed the industry; the digital currencies themselves have also started to gain the attention of the FinTech world.
For instance, Seba Crypto AG, a Swiss financial services company, recently raised about $104 million from a consortium of investors as it seeks to set up the world’s first crypto bank where customers can trade digital and fiat currencies.
According to one of the company’s co-founders, Guido Buehler, Seba’s vision is to make it possible for customers to access both fiat currency and crypto within the same online bank account.
Cryptocurrency is more popular and has greater rates of adoption in areas of the world with unstable currencies. In Venezuela, when the bolivar experienced rapid devaluation, cryptocurrency gained considerable traction as a more stable, reliable option.
It is also particularly relevant to the approximately 1 billion people worldwide who have a mobile device but no bank account. Being “unbanked”, these consumers don’t use traditional financial products, but they can use those that are built on cryptocurrency.
In both cases, cryptocurrency helps open up new markets where FinTechs can find consumers who may now be able to benefit from their products. Indeed, cryptocurrencies are built on a secure, decentralised public ledger, and can be moved back and forth much more quickly than traditional ones. This has the additional effect of greatly reducing transaction costs. Speed, transparency, and convenience are the cornerstones of FinTech innovation, and cryptocurrency is part of what makes it possible to build solutions based on those principles.
Even as disruptors, FinTechs still face the same issues around fraud, identity theft, and money laundering as legacy financial institutions do. Thwarting such activity is challenging, time-consuming, and labour intensive. Cryptocurrencies are built on distributed, decentralised ledgers, and their transaction records are easily verified. Given the secure nature of blockchain technology, these records cannot be manipulated or obscured, which makes fraud prevention a less costly and simpler enterprise for FinTechs.
FinTech innovation has been a significant disruptive force in the financial sector. Over the past decade, we’ve seen financial services and products change dramatically as FinTech solutions have offered consumers more appealing alternatives to traditional products.
In Europe, Ledger, Bitpanda, and Blockchain, represent 20% of the accumulative European Unicorn valuation from last year, going in line with the global adoption trend on crypto/blockchain technology. This year, Austria raised its first FinTech unicorn with Bitpanda, a Vienna-based digital investment platform that specialises in selling and buying Bitcoins and other cryptocurrencies.
However, the first quarter of 2022 and the economic downturn in many areas was enough to raise doubts about the FinTech ecosystem. In the first three months of the year, one in five dollars invested went to FinTech, according to a report by CB Insights. In all, FinTechs managed to raise $28.8 billion in venture capital, down 18% quarter-over-quarter (QoQ) — the largest percentage drop in quarterly funding since 2018.
In two years, the FinTech landscape has completely changed, it went to corporate performance powered by a massive presence of investors to B2B, and P2P. Before being mainly intended today to be cryptocurrencies.
Regionally, in the first quarter of 2022, US blockchain startups raised over $5B in funding, representing nearly two thirds of global funding. Asia followed with blockchain funding hitting a record high of $1.5B, up 275% compared to Q1 from last year. 85% of deals were early stage, signalling a still nascent market ripe with opportunity. While in Europe Funding jumped 77% QoQ and with 84 deals hit a record high.
After neobanks, which attracted a large share of investment and attention in 2020, payment FinTechs have taken over. Today, more than half of FinTech investments have changed course to invest in crypto Start-ups (4 out of the 10 biggest fundraisers of the quarter), along with Cross River, Fireblocks, ConsenSys and FTX.
Among investors, several funds specialising in the areas of crypto joined the top 10 in the first quarter. We note the presence of Animoca Brands, which has enabled the United States to collect the largest share of global investments, followed by Asia and Europe. Coinbase Ventures, the investment fund of the cryptocurrency exchange platform, made 20 investments in the first quarter of the year.
Although some funds like Tiger Global (39 operations in 2022) or Coinbase Ventures inject capital into large Start-ups, 62% of operations were geared towards new player launches.
Mainstream FinTech companies across various industries are still taking an interest in Blockchain and cryptocurrency, which is driving the growth of the crypto industry.
For example, Square and PayPal (FinTech companies) already allow users to buy cryptocurrency directly on their platforms. Even the automotive giant Tesla holds billions of dollars in crypto assets, proof that more and more multinationals are interested in these new means of payment.
Qonto also aims to offer a complete banking and financial solution for SMEs and announced in June their opening up digital assets thanks to an alliance with the french crypto-exchange Coinhouse.
The French unicorn and the crypto platform have thus unveiled a partnership aimed at allowing more small and medium-sized companies (customers only for now) to invest in this new asset class, with the ambition “to move the lines of traditional finance”.
Crypto regulation is evolving accordingly
After a time of acceleration, comes that of regulation, according to the well-known innovation-speculation-regulation cycle.
The recent pandemic lockdowns have allowed the cryptocurrency market to grow exponentially in a short period of time, reaching a valuation of 2.3 trillion dollars today, which is more than that of subprime mortgages in 2008 (1.2 trillion). Nevertheless the fear for cryptocurrencies is as big as the enthusiasm it drives. Perceived as an alternative investment it feeds precisely on the crises and upheavals of the traditional economy.
Therefore, all over the world, regulators are working to control, if not contain, this digital wave. The US President Joe Biden is now encouraging monetary and financial authorities to focus on the digital dollar and the risks associated with cryptocurrencies, particularly in the areas of fraud or money laundering.
The extension of European directives from the world of finance to cryptoactives has brought awareness to the regulation of cryptocurrencies. Among these adaptations, the vote of the MiCA (Market in Crypto Assets) which will shortly bring a first stone to regulation at European level.
Members of the European Parliament (MEPs) have reviewed and amended the European Commission's proposal and in March 2022 decided to begin negotiations on the final shape of these rules with EU countries in the Council.
In order to encourage the development and use of these technologies, the new rules aim to provide legal certainty, support innovation, protect consumers, investors, and ensure financial stability.
The rules cover transparency, disclosure, authorisation and supervision of transactions. MEPs want the issuing of some of the tokens to be supervised by the European Securities and Markets Authority and the European Banking Authority. Businesses dealing with crypto-assets will have to better inform consumers about risks, costs and charges. By regulating public offers of crypto-assets, the rules would ensure financial stability, while other measures tackle market manipulation, money laundering, terrorist financing and other criminal activities.
After the MEPs negotiate the final shape of the bill with EU governments, it must be adopted by the European Parliament as a whole as well as by EU countries.
The new rules are part of a wider Digital Finance package that supports the EU's digital transition by encouraging innovation while ensuring protection. In March 2022, Parliament adopted new rules to support testing of the distributed ledger technology in market infrastructures.
In April 2022, Parliament also agreed to start negotiations with EU countries on rules that would allow the tracing and identification of transfers of crypto-assets.
The crypto outlook
Although the crypto markets have seen wild fluctuations over the last year, they continue to be adopted by people from all over the world in staggering numbers. This means that central banks, governments, and other regulatory bodies have had to step in to try and create some order in an industry that still has a bit of a “Wild West” feel to it.
In many ways, 2021 was the breakthrough year for digital currencies. Bitcoin will thus have reached record prices, before fluctuations eventually cause it to fall to its lowest levels in 2022. From there, the US government decided to add new regulations for all cryptocurrencies - an initiative that will not have discouraged investors interested in cryptocurrency, despite the fact that this industry, in perpetual evolution, seems to be reaching some limits.
As can only be expected in the cryptocurrency ecosystem, the range of views is extreme. Some see this market correction as a great time to “buy the dip”. Others believe this is the end of the party for cryptocurrencies. It is therefore difficult to predict how things could unfold in the long term.
At the same time, the traditional financial sector was becoming increasingly accepting of cryptocurrencies as a legitimate asset class. A Fidelity study from last year to institutional investors found seven in 10 expected to buy or invest in digital assets in the future.
Fidelity forecast indicates a continued acceleration in cryptocurrency adoption over the next several years, across regions. Asia was most interested in Future investments intent (80%), followed by Europe (75%) and the U.S. (60%).
Without a doubt, cryptocurrencies, the underlying blockchain and other distributed ledger technologies are now being taken seriously, not only by governments and regulators but also by the banking, finance and clearing sectors.
In the decade to come, cryptocurrency will play a significant role in shaping emerging FinTech innovation by unlocking new markets and supporting increased efficiency and convenience in product offerings.
Indeed, world-famous firms could relaunch payment by cryptocurrency this year. So, if Amazon joins in and accepts bitcoin payments, it could create an unprecedented chain reaction.
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