The failure of Silicon Valley Bank (SVB) on March 10, 2023, sent aftershocks through a cryptocurrency sector already reeling from FTX’s implosion, general uncertainty in the global economy and confusion about evolving regulation in the US.
With the news of SVB's downfall, the future of cryptocurrency took another unexpected turn.
What will happen next is hard to predict in one blog post, especially as the impact of last week’s rollercoaster events will continue to unfold.
Will bitcoin and other cryptocurrencies eventually navigate the political minefield and make their way into the mainstream? Or will traditional finance (TradFi) embrace cryptocurrency to replace traditional money, making cryptocurrency unnecessary?
Let’s look at cryptocurrency’s current landscape and some ideas for future trends.
Future Trend: Increased Institutional Adoption
As a refresher, a financial "security” represents ownership in an entity, while we use traditional currencies (fiat) as money - a means of exchange.
Broader economic conditions and market sentiments influence the value of securities.
In terms of cryptocurrency regulation, SEC Chairman Gary Gensler has essentially said that if it walks like a duck, etc., it's a duck. The SEC views cryptocurrency as a security subject to securities law and taxes and will likely continue to do so.
In terms of IRS cryptocurrency regulation, the IRS treats cryptocurrencies as property and is soliciting feedback about plans to tax some NFTs as collectibles.
Despite the sector's volatility, established TradFi firms and institutions will continue to respond to consumer demand and integrate cryptocurrency into their offerings.
Future Trend: Cryptocurrency as Money (Probably) Isn't Going Away
As for fiat (aka money), government central banks exert centralized control over the money supply. They back, regulate, and issue fiat currencies and are responsible for keeping the national currency relatively stable.
Cryptocurrency is digital money that makes payments faster, cheaper, and simpler. It also allows people to bypass traditional banking and make cross-border payments more transparent. It can even automate millions of transactions that would usually require a third party.
Global wealth disparity is widening, monetary policies are faltering, and TradFi doesn't meet the needs of millions of people. As a result, people in countries worldwide see cryptocurrency as the future of money.
The number of people using cryptocurrency for its intended purpose, as money, is increasing. This trend poses an obvious threat to traditional banking systems.
Future Trend: Cryptocurrency Twins of Fiat
Public demand for an alternate currency has not escaped the notice of traditional financial institutions. As we’ve seen, it's a threat to their market dominance. Banks are at risk if large swaths of the public can effectively create marketplaces outside of traditional currency.
Stablecoins are an early prototype for cryptocurrency as digital money tied to national financial systems. Stablecoins issuers attempted to peg their value to existing stable instruments, like the US dollar. Popular stablecoins include Tether (USDT), USD Coin (USDC), and Binance USD (BUSD).
There are a couple of problems with stablecoins. Crypto theorists feel that stablecoins tied to fiat are a poor compromise. They don't create a more "stable" coin; they simply link the shortcomings of TradFi fiat to the coin.
In practice, what makes stablecoins confusing is that if private companies issue them, instead of central banks, they look and act like crypto security. They are subject to volatility, marketing hype, quackery, SEC scrutiny, audit, proof of reserves and speculative investor activity.
We may see action on regulating stablecoins sooner than later. After the collapse of SVB, stablecoin proponents issued a renewed call for the US government to pass regulations adopting an "official" stablecoin analogy for the US dollar.
Future Trend: Rise of Central Bank Digital Currency (CBDCs)
Conversely, rather than spending significant time and resources to enable privately owned and issued stablecoins, governments may prioritize developing an official central bank digital currency (CBDC).
Central bank digital currencies (CBDCs) are digital versions of fiat currencies issued and backed by central banks. CBDCs have the potential to provide many of the benefits of cryptocurrencies while maintaining the stability and trust of traditional currencies. The NY Fed is taking steps in this direction with Project Cedar.
Other countries are also exploring CBDCs. The IMF says 105 countries, representing more than 95% of global GDP, are looking into CBDCs. Depending on their design, CBDCs could be an important tool in improving financial inclusion, fighting corruption, and lowering transaction costs.
Electronic monetary transactions are already widespread. Sovereign governments may eventually transition into national fiat CBDCs that mimic native cryptocurrencies but are controlled and issued by a central authority.
Future Trend: Crypto-killer Improvements to TradFi
Other possible developments might fall into a crypto-killer category: TradFi institutions adapting services and USD transactions to offer cryptocurrency's advantages.
For example, in July 2023, the US Fed is launching its real-time payments system, the FedNow Service. The system will operate 24/7 and provide immediate access to funds.
An overhaul of TradFi and fiat that includes the benefits of cryptocurrencies is a significant threat to the future of native cryptocurrencies. Mainstream users care less about crypto's ethos than they do its benefits.
Future Trend: Inflation as a Predictive Indicator of Crypto Adoption
The IMF points out that rapid crypto adoption is most likely to occur in countries where cryptocurrency improves the existing financial system. Gemini's 2022 State of Crypto report makes a strong case that inflation and currency devaluation are potent drivers of crypto adoption, especially in emerging market (EM) countries.
If inflation persists in developed countries like the US, it could spark resistance to CBDCs and increased interest in native crypto adoption.
Future Trend: Crypto Takes a Backseat to Fiat for NFT Transactions
The NFT market is related to cryptocurrency (mostly ether) because NFTs were initially bought, sold, and minted on the Ethereum blockchain using ether for transaction fees. That meant that to buy an NFT, you first had to have a crypto wallet.
Setting up a crypto wallet introduces massive friction in the sales process for the mainstream NFT buyer. Many mainstream buyers interested in NFTS do not care about cryptocurrency at all.
As a result, some NFT platforms and campaigns now accept credit cards, and some only accept credit cards. Rumors are circulating at the time of this publication that Amazon's rollout of its first NFT marketplace will only accept credit cards.
Decoupling cryptocurrency from minting, buying, and selling NFTs could be a massive boost for the NFT market, translating into significant demand for ether on the back end.
Maybe. The thing is, cryptocurrency is not essential to creating an NFT. You need a blockchain to record the transaction, but you could, in theory, pay those fees for doing it in fiat.
The real question is this: Is there a point when dealing with cryptocurrency’s regulatory and tax headaches no longer makes sense to NFT exchanges and creators?
Would they rather, for example, pay the blockchain a subscription fee in fiat for transactions?
Crypto advocates envision a future where bitcoin and other crypto natives operate alongside fiat currencies. While that could happen, it's also possible that powerful entrenched financial systems will simply co-opt the best of bitcoin et al., effectively undercutting the need for alternative digital currencies in the first place.
Some people also envision a world with one digital currency. While we have the technology to make that happen, we are light years away from having the global political alignment necessary for a single world currency.
In the short term, all the trends point toward the public's growing interest in cryptocurrency and governments coming to terms with the fact that there is now a viable competitor to fiat.
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This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.