Significant steps have been taken toward building mainstream infrastructure around blockchain and digital assets, writes Block.one President Rob Jesudason.
The recent dramatic fall-off in the price of Bitcoin and other cryptocurrencies has sparked considerable debate about their future. Compounding an earlier sharp retrenchment at the beginning of the year, the decline has been seized on by detractors as further evidence of a more permanent demise in cryptocurrencies.
This has caused real consternation in the market and 2018 may well go down in history as the year that saw the heat come out of the cryptocurrency market, with a major revaluation of all crypto asset classes. But if it does, it should perhaps also be seen as the year that saw both regulators and companies taking significant steps to engage with cryptocurrencies, heralding what should eventually be greater adoption of this asset class as a legitimate store of value.
One such step is exemplified by the launch of the Gemini dollar stablecoin by Gemini, an exchange founded by Cameron and Tyler Winklevoss. Marketed as being backed by the US dollar, this new coin is supervised and regulated by The New York Department of Financial Services (NYDFS), which has been described as “crypto’s toughest regulatory regime.” It joins a similar coin from the fintech company Paxos, which is also to be regulated by the NYDFS, and the crypto finance company Circle said it was also establishing a new “USD Coin.” As a November 16 Financial Times headline declared, “Stablecoins are crypto sector’s next big bet.”As more regulated assets like these come into play, the appetite for real institutional investment increases.
Away from the coins themselves, exchanges are also beginning to receive regulatory blessing. Lead among them is Coinbase, a licensed and regulated cryptocurrency exchange that has demonstrated robust security standards. In May, it hastened the adoption of cryptocurrencies by institutions by acquiring the asset management firm Keystone Capital and is introducing professional-grade trading tools for institutional investors. In October, after its latest funding round, it was valued at US$8 billion – a significant milestone for this burgeoning industry.
And among the financial institutions themselves, there have also been positive indicators, that they taking this sector increasingly seriously. Fidelity Investments – a fund manager with over US$2.5 trillion in assets under management – has announced its intention to launch Fidelity Digital Asset Services (FDAS), a cryptocurrency-focused subsidiary that will look to channel demand from customers into Bitcoin and other crypto assets.
Meanwhile, Goldman Sachs has become the first bank to set up a digital asset trading operation, while others including JP Morgan and Morgan Stanley have made hires that suggest they are preparing to follow suit.
All indications, in fact, point to continued institutionalization as structural barriers to adoption fall. On a global level, regulation is slowly but surely bringing clarity and transparency to the cryptocurrency markets. Simultaneously, concerns around custody and liquidity are being addressed: Fidelity’s FDAS will include “asset custody” services aimed at institutions, while Goldman Sachs and The Intercontinental Exchange (owner of the New York Stock Exchange) have also proposed solutions. The latter’s Bakkt service will offer “a scalable on-ramp for institutional, merchant, and consumer participation in digital assets.”
Another thing the cryptocurrency sceptics miss is that in many examples across financial markets, a boom in prices is often followed by a correction. Cryptocurrency markets have no reason to be any different and indeed the latest sharp falls in crypto have been mirrored in many other assets this year.
Significant volatility for example has been seen in the share prices of Deutsche Bank and General Electric, the exchange rate of the Turkish lira, and the performance of the Shanghai composite index.
The fact is that price volatility in 2018 has probably been impacted as much by the macro- economic and geo-political backdrop as it has by any asset-specific concerns. With the US Federal Reserve raising interest rates and Washington on the precipice of a trade war with Beijing, uncertainty is causing risk to come off markets in general. As might be expected, 10-year US Treasury bond yields have been rising all year.
Looking beyond these fluctuations, it’s also useful to consider the pattern of how previous market “corrections” have played out in recent years. After the dot.com crash at the turn of the century, we saw a long recovery in the tech sector as today’s tech giants of Google, Baidu, Facebook and Alibaba established themselves. Similarly, after the 2008 financial crash, the stock market went on a surging bull run that hasn’t fully abated. Some of the best-performing companies in the last decade have been internet companies, while others have come from emerging industries such as biotech.
The lesson here is that key industries – and key companies – matter and can withstand macroeconomic volatility, and the same can be said for financial assets too. Indeed, the point at which markets collapse is often the moment when great companies find their stride. For investors, it’s an opportunity to identify industries that will endure, and to champion emerging global leaders.
Right now, companies involved with cryptocurrencies and blockchain technology are part of an emerging industry. It’s an industry whose potential to revolutionize digital commerce, enhance security and protect identity has already energized markets. But uncertainty remains around how it will be adopted into everyday life, and how it can be regulated in a way that allows it to thrive.
What is certain is that companies that provide answers to the adoption question and work with regulators to arrive at sensible governing frameworks will likely succeed. What is also clear is that the infrastructure that will put blockchain on a stable growth trajectory is already shaping up. Blockchain is an industry that will endure – and the foundations laid in 2018 will go a long way toward iron-cladding that endurance.