The growth of the crypto-financial industry may also be influenced by several other trends over the next 12 months – and beyond. While they may not prove to be as fundamentally important as other market developments or technical advancements, they do warrant close attention, both in their own right and as part of industry-wide movements.
Interoperability Between Blockchains
Much like in the early days of the internet, the landscape of blockchain protocols and the cryptocurrencies which help power them is still largely fragmented. Bitcoin and Ethereum as well as a handful of other chains have developed into relatively stable ecosystems – each as a walled garden in and of itself.
This conundrum, whereby the technology of Web3 has been faced with the same challenges as that of Web2, poses a serious challenge to the further adoption of blockchain technology. According to Gartner, it is precisely this lack of interoperability standards that stands in the way of “pervasive blockchain deployment across financial services ecosystems.”
But there are major efforts underway to address this problem. One of the more ambitious and well-known interoperability blockchains is Polkadot, the brain-child of Ethereum Co-Founder Dr. Gavin Wood. Much like Cosmos, another one of the more established projects in the space, Polkadot addresses the interoperability challenge by creating a multi-chain by means of several so-called “parachains” which are connected to each other, as well as “bridges” to link to external chains.
With the support of the Web3 Foundation as well as a number of high-profile investors, Polkadot is aiming to launch its live network in early 2020.
The burning question for it and other interoperability chains is whether such fundamental infrastructure will indeed lead to a broad acceptance of blockchain as a base-layer technology for critical industries such as finance, healthcare, and supply chain management. In these cases, the need to preserve confidentiality has placed an emphasis on private blockchain implementations which may or may not play well with the broader, “world-wide web” of blockchains. At the same time, these industries are large enough (and international enough) to make it difficult to imagine a single blockchain that will meet the needs of all stakeholders in every location and every situation.
Some have tried to pursue the consortium model to build a cross-business or -industry consensus and promote standards. The Enterprise Ethereum Alliance is one such group, while Hyperledger, with IBM as a major contributor, forms another.
This would seem to be the less efficient approach, however, given the challenge of aligning business and operational incentives and goals within a large, corporate-like structure. Even so, there has been serious progress made in providing technical tools to serve such consortia. Hyperledger Besu is one such implementation.
Ultimately, the challenge of ushering in a (near) universal standard for Web3 applications and technology will likely be a market-driven decision with a winner chosen by those who find it easiest to use and most aligned with their needs.
The year 2020 may well see the first baby steps in the development of a wider, more inter-connected blockchain “web” – but it will likely be some time before we see a robust ecosystem without walls emerge.
When viewed through the prism of relative cryptocurrency price volatility, the appeal of stablecoins is easy to understand. This past year has seen a rise in their popularity and increased discussion around their usefulness, especially since the announcement of the Facebook-backed Libra project in July. Some of Europe’s top institutions have weighed in on the topic of stablecoins, with the European Central Bank issuing a report on the subject and the Swiss regulator FINMA releasing guidelines on their treatment.
In general, stablecoins do not generally seem to offer a compelling investment case since their value is, by nature, pegged to some other currency or asset. They can, however, play a role in decentralized finance systems, with one of the more popular stablecoins, DAI, being the result of one of the most advanced DeFi setups developed to date. Stablecoins also have the potential to facilitate blockchain-based applications where a common, stable digital currency is needed for interactions with the app’s smart contract layer. This provides reason to believe that the market for stablecoins will continue to increase.
In addition, macroeconomic forces point to greater interest in a stable crypto-like currency. China recently made known its interest in developing a nation-wide digital currency, a fact which some believe will spur acceptance of the Libra project by US and European regulators. The Swiss National Bank (SNB), in cooperation with the Bank of International Settlement (BIS), has indicated that it will explore the same idea, with a mind to integrate it into DLT infrastructure. If these two initiatives, among others, were to move forward significantly over the coming year, it could have a strong influence over other crypto trends, in particular tokenization and decentralized finance.
As one of the most popular buzzwords associated with blockchain technology, the concept of tokenization is often misunderstood
Simply defined, tokenization is the process of assigning the rights to and attributes of an asset to a digital token which lives on the blockchain. The explosion of Ethereum-based tokens issued in initial coin offerings in 2017 drew widespread attention to the concept of tokenization in various form; it also inspired regulatory efforts to classify tokens and make legal sense of them. In Switzerland, FINMA has outlined three main token types: utility, payment and asset.
Over the last year, the excitement over utility tokens – those used to confer access or usage rights to an application or protocol – has generally subsided. However, a second generation of utility tokens may become more relevant in the future: Corporate utility tokens issued by companies for such use cases as loyalty and referral programs. One such token will be issued by Emaar, the Middle East’s largest real estate and property development company. Tokenizing such loyalty and referral programs has the potential to reduce friction costs and improve accessibility.
Today, interest in tokenization is also focused in large part on the possibilities of so-called asset tokens, which may represent the partial ownership in a real estate property, revenue-sharing rights in a collective investment scheme or any other of a myriad of possibilities. Tokenized equity for the shares of small- and medium-sized businesses and tokenized corporate debt is also a hot topic.
Problems, however, arise because there is no universally accepted standard for the legal treatment of the many and varied asset token propositions being explored in different countries. There is also limited market infrastructure for trading and storing them, not to mention service providers who may legally deal in such tokenized securities.
It is also questionable whether the more exotic use cases for asset-backed tokens, such as tokenized collectibles, wine and art, offer a sufficiently strong value proposition for them to be widely accepted.
Nevertheless, the market infrastructure which may eventually open up the possibility of tokenized equity and debt continues to develop – albeit slowly and sometimes by fits and starts. Despite having launched a prototype of its digital exchange, SDX Chairman Thomas Zeeb recently admitted that the development may be somewhat too early for the banks which are financing the project. Meanwhile, a proof-of-concept for the settling of tokenized shares coordinated in cooperation between Swisscom, Deutsche Börse and three Swiss banks was successfully completed.
These advancements provide reason to believe that if tokenization is to truly take off, it may well get its first boost from Switzerland. The only doubt is whether there will be enough demand from investors and those tokenizing assets to sustain the innovation in the long-term.
The ability to pay for everyday items with cryptocurrencies has long been seen as a barometer for the level of crypto asset adoption. As it was originally styled to be a “peer-to-peer electronic cash system,” Bitcoin was expected to provide a universal medium of exchange to pay for anything and everything.
Today, that goal remain only partially realized at best. As the price of Bitcoin and other crypto assets took off in late 2017, transaction fees also rose dramatically, making it less attractive to use them as a day-to-day medium of exchange. The lack of universal infrastructure for accepting crypto payments, as well regulatory uncertainty in some countries have also factored into the low adoption rate of crypto payments.
Despite these mixed results, it is important to watch the crypto payments space, both on a retail and institutional level. Payment providers are increasingly aware that consumers value the opportunity to pay in a variety of ways, meaning that all options (including paying with crypto) should be made available.
Worldline, Europe’s largest payment system provider, confirmed this fact in announcing its partnership with Bitcoin Suisse to integrate crypto payments into its point-of-sale terminals and in online shopping. Facebook’s Libra project has put a focus on the ability to execute cross-border retail payments seamlessly, something that cryptocurrencies can and should play a central role in.
At the institutional and international level, there is growing interest in developing cryptocurrency-like payment systems, such as the one proposed by BRICS or the solution being explored by the Monetary Authority of Singapore and JPMorgan for cross-border payment and settlement. In these cases and others like them, process efficiency seems to main focus, rather than decentralization of finance. Whether there are any long-term benefits remains to be seen.
Beyond supporting payments for goods and services in order to realize Satoshi’s original vision of peer-to-peer electronic cash, increased usage (and transactions) of cryptocurrencies payments is key for another reason. The transaction fee paid by those transacting plays a significant role in the overall network security by incentivizing miners. As the Bitcoin block reward continues to shrink, this will be more and more important, since these transaction fees can help guarantee the security of the system.
If second-layer solutions and other technical integrations advance over the next year, bringing crypto payments to shops and inter-bank systems as well, then adoption will contribute to an even stronger ecosystem.
Institutional Crypto-financial Products and Services
Throughout the latter part of 2017 and deep into 2018, crypto market watchers repeatedly hailed the arrival of so-called “institutional money.” While a large number of crypto investment funds did spring up and many venture capital firms turned their focus to crypto companies during this time, their numbers were not as significant as imagined and the sharp influx of money from professional investors failed to materialize.
Now, nearly two years on, it is still too early to speak of a sustained wave of investment from institutions. Several factors have contributed to this situation:
- Lack of regulatory clarity regarding cryptocurrencies
- Low level of blockchain and crypto technical understanding
- Lack of traditional crypto-based financial products
- Fear of potential KYC/AML complications
Regulatory approval, and in particular, fears of market manipulation, have been a major stumbling block to the approval of crypto exchange-traded-funds (ETFs) in the United States, where, for instance, Bitwise has faced a roller-coaster process trying to gain the SEC’s blessing for its product.
There are, however, other signs that institutional-grade products and services are on the rise. Crypto custody providers are now able to offer banks and asset managers the level of security needed to satisfy their requirements. For a crypto derivatives trading platform such as the Intercontinental Exchange-supported Bakkt this is key. Bakkt’s physically-settled monthly Bitcoin futures contracts, despite their slow start, have steadily increased in popularity – another sign that once the pieces are in place, there is strong potential for institutional crypto products.
In Switzerland, the country’s major stock exchange, SIX, has listed ten crypto-based exchange-traded-products (ETPs) over the last 18 months. At the same time, SIX itself has begun intense development work on its next-generation infrastructure, the SIX Digital Exchange, which has the aim to eventually trade not only cryptocurrency-based traditional financial products, but also an entirely new asset class of tokenized assets.
Mass adoption of crypto ETPs and ETFs may still be a few years away, but 2020 is likely to see more foundational work done, thus preparing the way for more institutional money to flow into the market.