Digital assets should return to the spotlight

2022 was a rocky year for the digital assets industry, with significant market value losses. The FTX scandal hampered the trust of crypto investors and the industry in general. These hardships are only temporary, as the previous crypto cycles have shown. Even though this crypto winter did not follow the usual cycle trends, blockchain technology should return to the spotlight. The only question is when. 

Digital assets have broad applicability, for example, in cross-border payments because of higher speed, security, and decreased costs. Companies and organisations will work on it, finding ways to unlock and develop the technology, regardless of the crypto market movements. Some initiatives from governments, for example exploring wCBDCs and slowly moving towards CBDCs, are even seen.

In any case, despite the volatility and big collapses, we are definitely in the heyday rather than the decline of the digital asset industry. Markets always go up and down, but solid technological foundations that solve real world problems will also always be relevant. 

Digital assets growth in consumer payments

Recent sources show a meaningful share of consumers worldwide actively involved in trading, transacting, or holding digital assets, with exceptionally high rates in emerging markets. For example, the European Central Bank (ECB) has indicated that as many as 10% of households in six large EU countries owned digital assets. 

Despite crypto's volatility, its importance in the modern market is ever-growing. According to Zippa research, there are currently just over 15,000 businesses that accept bitcoin or that offer bitcoin ATMs around the world. And nearly 75% of retailers plan to accept cryptocurrency or stablecoin payments within two years, according to a Deloitte survey called "Merchants getting ready for crypto.”

By taking crypto as payment, companies can ensure they receive funds instantly, without currency conversion fees and regardless of where the customer is located. When a company receives payment in crypto, it's easier, faster, and cheaper to transfer the funds between different regions. For example, if the Asian office gets the funds but needs to transfer them to Europe for wage payments or to pay their suppliers. Online crypto payments have a much easier flow than traditional physical payments. Therefore crypto currency adoption for e-commerce use-cases is becoming much more popular.

What can be done with volatility? 

To take crypto as payment and then immediately convert it to fiat is one approach traditional companies use to guard against currency fluctuation risks. Some jurisdictions prohibit enterprises from holding crypto on their balance sheet. So they need to either exchange it straight away or use a third-party service which collects crypto and sends them the equivalent in fiat, thus enabling them to accept crypto but not actually process it. Another approach we are seeing from our clients is that digital businesses across a range of industries pool the customers' funds, and once they reach a more significant sum, they convert them to fiat via an OTC desk service. It allows you to get a better rate than when converting each trade individually and save on some transaction costs.

One more way to guard against volatility to some extent is to use stablecoins, whose value does not fluctuate as much. Overall they are seen as more trusted and suited for transactions than any other crypto coins. In particular, the big stablecoins, asset-backed instead of algorithmic ones, are considered the best for transactions.

Drawing lessons from the FTX collapse for better regulation 

FTX’s collapse was a big surprise for the industry, but it certainly doesn’t “spell” the beginning of the end for the digital assets industry. As a CEO serving this industry, I would have to say the industry is marching firmly forward, despite a bear market and difficult global conditions. Any young or developing industry will be attractive to opportunists who are more interested in the glam than in doing the heavy lifting. 

In the long term, this will only positively affect the market's development and crypto adoption. This event only illustrates that we need to decrease the possibility of any scammers taking advantage of crypto users. To minimise the likelihood that events like this will repeat, greater transparency and regulation for crypto markets are needed. Similarly, as the Enron scandal resulted in increased regulation for the reporting of public companies, the outcome of FTX bankruptcy will likely be a driver for increased regulation of the most significant crypto players. 

An attempt to centralise the industry with CBDC

The central bank digital currency (CBDC) projects that, according to McKinsey & Company, are already being implemented by about 90% of the world's central banks can be seen as such an attempt. Some of these, including in the US and South Africa, are in the research phase; others are development projects (European Union) and pilots (China). Solutions are already working in some places, including Nigeria and the Bahamas, and central banks seek to expand them. 

The main benefit of CBDC is that individual transactions do not have to be approved by the banks. Such transactions would be faster, cheaper, and more direct. They would not need direct input for each transaction, like Bitcoin transactions versus Revolut payments. Crypto payments “happen by themselves” and don’t need an institution to approve them. 

The main benefit of CBDCs is that transactions do not have to go through banks. They are fast, cheaper, and directly between the parties. They would not need direct input for each transaction. Crypto payments “happen by themselves” and don’t need an institution to approve them. 

However, while surveillance of transactions is already high, it is decentralised in thousands of financial institutions rather than the public. For CBDC, the control would be centralised and potentially public, meaning that both the issuer of the currency would be able to monitor every transaction completed with its currency directly, but also anyone else with access to the blockchain data would be able to make similar monitoring, which could become dangerous from a public safety perspective. One way forward here could be if the transactions are seen by anyone, while the information about which wallet belongs to who would only be known to the issuer. It’s hard to imagine that global governments would allow anonymous wallets and transactions with their CBDCs. So assuming they are adopted, it becomes paramount to ensure the privacy of all the connected users.

The main question on the digital asset industry's agenda will be whether it is possible to create such a centralised system that still maintains blockchain's security, trust and other benefits. In a total control scenario, where central banks see every transaction for each and every wallet, this amount of data would not be feasible.