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Cryptos lack regulatory environment, are speculative, yet gaining wider acceptance

Cryptos keep gathering momentum and making believers out of long time skeptics, yet they lack the regulatory credentials needed to truly take off

Nearly half of the world’s billionaires now have made their money in crypto S&P Global Ratings believes cryptocurrencies continue to be speculative instruments Visa and Mastercard are building capabilities to eventually allow the movement of stable coins and CBDCs

China with its digital yuan is a leader in the field of digital currencies. However, other countries are closely following suit. This was the consensus of a session titled ‘Is Crypto the New Currency Beyond 2021?’ on day one of the World Government Summit (WGS) Dialogues.

Emphasizing the importance of getting governments on board when shaping the regulatory environment for digital currencies, Brock Pierce, co-founder of Blockchain Capital and IGE said: “What’s imperative is that we make sensible decisions when we are passing regulations. Nearly half of the world’s billionaires now have made their money in crypto. As we live through what could be the greatest wealth trend in the history of the world, it’s important to have more people participate in it.”

Speaking on the challenges to cryptocurrency adoption, she added: “I think there’s a lot of fear around digital and cryptocurrencies, which are different from stable coins. They frighten regulators and policy-makers, which is understandable because it’s a new technology, and most of the hype out there is about when things go wrong, not about when things have gone right. We need to focus on the use cases and not so much the technology stuff.”

Anthony Di Iorio, Founder and CEO of Decentral and Co-Founder of Ethereum said: “Governments need to embrace cryptocurrencies and educate people about them to ensure they’re not hindering the growth of their countries.”  

Speaking on industry regulation, Denelle Dixon, CEO and Executive Director of the Stellar Development Foundation (STF) said: “The network layer should not be regulated, as it needs to be decentralized. Decentralized exchanges allow people to hold assets all over the world. Financial institutions that issue assets are already regulated. We need to make sure that we’re just regulating to address any gaps that exist with respect to digital assets because innovation outpaces regulation.”

Pierce said: “The barrier to entry in financial services is extremely high, which is why there have been so few startups and innovators in this field historically.”

Di Iorio added: “Cryptocurrencies have removed the friction from traditional systems, and governments need to do the same in terms of legislation to attract talent to their countries.”

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Read: Tesla in Bitcoin’s driver’s seat, sending the crypto’s prices to the roof, literally

Cryptos are still speculative: S&P

S&P Global Ratings believes cryptocurrencies continue to be speculative instruments, which investors mostly use as a store of value rather than a means for commerce, despite some moves toward broader adoption.   

S&P Global said regulators and much greater public confidence are the keys to more widespread use. In the long run, we see a greater chance of large-scale adoption of central bank digital currencies (CBDCs) as a means of payment than private digital currencies.  

Ultralow interest rates, substantial liquidity, growing inflation expectations, and high valuations for other securities may have contributed to the renewed interest by investors in Bitcoin, according to S&P Global. 

In S&P’s analysis of risks, it noted that “Last year, Bitcoin reportedly consumed a broadly comparable amount of electricity as the Netherlands or the UAE consumption.” 

“We view cryptocurrencies’ price volatility as a limited risk for the financial institutions we rate. We believe a collapse in the value of cryptocurrencies would be just a ripple across the financial services industry, still too small to destabilize the system or weaken the creditworthiness of banks we rate.”

Some banks which are active in marketing cryptocurrency ETFs (exchange-traded funds) might be exposed to reputational risks if prices collapse, it added.

Credible players with big stakes in Bitcoin

“We have seen the first ETF launched in Canada and a few others lining up. Traditional asset managers are becoming more open to the idea of investing in cryptocurrencies or in taking positions. Blackrock, for example, announced that Bitcoin derivatives registered on commodity exchanges will become eligible investments for a couple of its funds. In the same vein, U.K.-based Ruffer Investment Co. took a £550 million position on Bitcoin,” said S&P Global. 

Also, the assets under management of Grayscale Bitcoin Trust, managed by digital currency asset manager Grayscale, increased tenfold from $2 billion in 2020. 

“Finally, we have also seen new players starting to accept or offer products connected to cryptocurrencies, with large payment providers (Visa and Mastercard), PayPal, and Tesla, being the most noteworthy examples, but volumes remain marginal.”

Visa and Mastercard have partnered with crypto wallet providers (for example, Coinbase, BlockFi, and Wirex) to issue cards, allowing the customers of those companies to spend their digital currencies at merchants on their networks, following conversion to fiat money by the wallet providers. 

Visa and Mastercard are also building capabilities to eventually allow the movement of stable coins and CBDCs directly on their networks, which could help pave the way to much broader acceptability. 

Tesla recently announced it will start to accept Bitcoin as a means of payment, and also bought $1.5 bn worth of Bitcoin.

Bitcoin manipulation, and market size

Despite such interest, the market is still concentrated, with about 1 million active addresses among the 30 million with nonzero balances and only 788,000 addresses with more than 1 Bitcoin. 

The number drops to 16,000 if we increase the minimum holding to 100 Bitcoins (all numbers are as of Feb. 22, 2021, and from Glassnode.com). 

“Such concentration makes the instrument prone to market manipulation,” S&P Global opined. 

Global stock market capitalization reached approximately $85 trillion at year-end 2020, compared with Bitcoin at around a recent $1 trn in market cap.