Now is the time of year that we will become inundated with lengthy narratives about cryptos’ progress over the past decade and year, including one expert’s or another’s opinion on what will be the fundamental drivers for 2020. We are starting a new decade with a great deal of accomplishment behind us, but the crypto industry is still in its nascent stages. There is still much work to be done, especially in the regulatory arena.
Pundits prefer to talk about anything but regulatory issues, opting for what will grab headlines going forward. Suffice it to say that G10 countries have thrown the gauntlet down by adopting the proposals of the Financial Action Task Force (FATF). Come July of next year, there will be the first deadline or checkpoint on the industry’s progress. This topic is usually covered in the “Other” section of every report, but if the industry is to grow and prosper, government authorities and law enforcement officials must approve.
Coindesk, one of the more respected crypto news outlets in the Crypto-verse, has already announced that they will produce one hundred op-eds in its attempt to present “2019, a Year in Review”. We have no intentions of following suit, but as we canvass these thought pieces, we will present the more material insights that evolve over time. In one particular article, Charles Hayter, co-founder and CEO of digital asset data platform CryptoCompare, kept it short and sweet by enumerating, from his unique perspective, four major trends that he believes will reshape all things crypto for 2020 and beyond.
Hayter viewed 2019 as “a year of breakneck trial and error, development and refinement”. He sees no slowdown in 2020. Every week, there was a new story about a breakthrough brought about by blockchain technology, as years of research and development were delivering market-ready solutions. Forbes produced its “Top 50 List” of large global corporations that were deep into implementation stages of initiatives that each felt would deliver greater operational efficiencies and lower costs.
Hayter listed just three examples. New Balance, a popular sportswear manufacturing company, was taking advantage of the Cardano blockchain platform and its tracking capabilities to revolutionize its global supply and delivery network. Malta, which became an attractive operating location for several exchanges, including Binance, surprised observers, when the local Gambling Authority tested the use of cryptocurrencies in its casinos. The Bank of France also announced its development plans for a national digital currency. According to recent estimates, 67% of the world’s central banks have similar projects underway. China plans to start implementation efforts in 2020.
The CME and the CBoE introduced the U.S. market to cash-settled futures in late 2017. Many analysts attributed Crypto Winter to this introduction, but a fully functioning market requires all “tools” present if price discovery is to be an efficient process. Yes, big players could suddenly short the market, thereby proving a control of upside “hype”. Volatility declined, as well. There had also been experimentation overseas, where the regulatory hurdles were not nearly as severe, causing an explosion in 2019 of major exchanges suddenly offering futures and options, primarily to compete with Bitmex.
According to Hayter: “Large, established spot venues such as Binance, Huobi and OKEx, now all offer futures and even options on large-cap crypto assets. Expect to see a further explosion, especially from market dominant exchanges. Estimates are the crypto derivative volumes are “10X” spot volumes. Fee revenues with leverage can be enormous, too much of a temptation for exchanges to ignore. Asia is already considered to be the “Crypto Casino” of the world.
Industry data purports that DeFi projects literally tripled in scope in 2019, crossing over $650 million in funding. Venture Capital firms have jumped all over this space. Current estimates of fundraising for 2020 are all over the map, ranging anywhere from $1 billion to $5 billion. Bitcoin evangelists in the old days claimed that no one in the crypto-verse would ever loan out your Bitcoins, as bankers do with your deposits to expand the money supply. Exchanges today have billions of dollars on deposit, just sitting there, doing nothing. You will have to give your consent, but it will mean more return, too.
Once again, the temptation for exchanges is too compelling. Pressure on fee revenue streams will heat up, as competition to be the first with every tool possible leads to market share winners and losers. An entire arena of professionals will be needed to coordinate, evaluate, grant credit, and monitor outstanding balances, an yes, tend to collections, as well. In the long run, the industry exchanges may become a funding source for miners and other participants in the entire crypto value chain.
Regulatory issues are foremost. Per Hayter: “Overall, a great deal of work has been undertaken to establish best practices in the digital asset class. Industry bodies such as Global Digital Finance have worked with members to promote a shared set of professional standards that include a commitment to comply with relevant regulations. Substantial progress has been made worldwide with respect to regulation, encouraging financial market institutions to wake up to the potential of digital assets.” Such good efforts will hopefully provide leniency when the first deadline looms large in July.
Custody has been an ongoing problem, along with adequate firewall protection to beat back profession hacking gangs. There are already a number of institutional-grade custody arrangements in operation today, but in order to keep one step ahead of the criminals, more advanced methods will become commonplace. “Fake” volumes may also, hopefully, become a thing of the past, and institutional investors will choose to be more active participants than just buying their way into Grayscale’s Bitcoin Trust. They reported $255 million in deposits for Q3. Politicians and regulators have also softened their stance on all things crypto, a change in attitude, which should grow with time.
There you have one “insider’s” perspective for 2020. Expect to see many more twists upon the same themes from other sources. Hayter concluded: “So, as we look back over the last twelve months, the digital asset markets have diversified and grown. New trading facilities allow for more sophisticated strategies, as new service providers turn crypto from fringe asset class to fintech innovation hub. Vital market infrastructure and products tailored to a more sophisticated investor base are now readily available, encouraging traditional firms to enter the asset class.”