Article 7 min

Crypto Winter: Is the Ice Finally Thawing?


March 7, 2019  


Is the crypto winter, as it were, over? While prices of cryptoassets remain volatile, real questions about adoption and regulatory frameworks remain unanswered: Are there effective use-cases and business models? Are the appropriate rules and procedures for financial oversight in place, to protect users, investors and markets?

Of course, the answer is much more complex than a yes or no. At the time of writing this post, there were over 2,000 (currencies or tokens) trading on more than 16,000 exchanges. Many of these cryptoassets will go nowhere as they have weak ideas or teams or technology, or a combination of these factors; some are outright scams; the rest, however, do show some promise in causing disruptive change.

The crypto industry is at a nascent stage; it operates across borders, touching various regulatory jurisdictions; from a compliance standpoint, there is still a lot of work to be done.

Having said that, the industry has shown progress; questions about scalability, adoption and regulatory clarity are beginning to be answered. Let’s take a look at some of the factors that are critical to the future of crypto.

Can the technology scale? 

While much has been written about how cryptocurrencies will replace incumbent payment methods, the reality is that they are unequipped to handle transactions at a global scale – at least, not yet. While there are some projects that can, reportedly, handle thousands of transactions per second (tps), the largest of these, namely Bitcoin (5.68 tps) and Ethereum (15.62 tps), do not operate anywhere near the scale of payment giants such as Visa (24,000 tps). As highly decentralized networks, the architectures of Bitcoin and Ethereum are at a disadvantage when it comes to transaction speed; reaching a consensus amongst numerous parties – the core mechanism of these technologies – is , by its very nature, a time-consuming process.

However, the vast financial and development resources dedicated to the issue have turned up some very promising initiatives. One class of scaling solutions, dubbed Layer 2, uses off-chain processes to offload transactions outside the blockchain, increasing transaction throughput and lowering transaction costs.

As opposed to placing and confirming every transaction on the main blockchain, these Layer 2 solutions open up a side channel where transactions are recorded independently. They then can be recorded to the main block at a later date.

One such solution – the Lightning Network for Bitcoin – has seen a 400% increase in payments in the last year. While still in beta mode, its rapid adoption indicates that it could possibly be a promising solution for Bitcoin scaling. Other Layer 2 solutions for Bitcoin, Ethereum, and other blockchains, have shown progress too.

Will the real world actually adopt it? 

All the technology in the world won’t matter if it’s not used; are consumers and businesses starting to adopt blockchain solutions? One measure to consider is transactional volume and, with that consideration, Bitcoin is seeing rapid growth with 80 percent yearly growth in the last five years, amounting to $1.3 trillion of transactions in 2018. The caveat, though, is that traders still initiated a majority of Bitcoin’s transactions, rather than consumers using it for transactions or remittances.

One project that has the potential to significantly drive adoption is Bakkt. The proposed Bitcoin futures trading system is being developed by Intercontinental Exchange (ICE), which owns the New York Stock Exchange. Bakkt, which has the backing of many institutional investors and partnerships with both Microsoft and Starbucks, could become a federally regulated platform (which many experts think it will, considering the pedigree of its backers); if it does, it could provide a new standard for Bitcoin market integrity and catalyze serious investors to enter the market. It could also provide exposure to the asset to the estimated 100 million Starbuck users.

Another blockchain sector that is getting significant attention and could also drive adoption is stablecoins. Stablecoins are cryptoassets that are pegged to another asset to deliver the advantages of crypto without the volatility. There are already 29 different stablecoins – many pegged to the US dollar. US banking giant JP Morgan recently announced JPM Coin, a stablecoin designed to speed up payments between corporate customers. The rumor of a Facebook stablecoin is getting stronger. The promise of a stable price, along with low transaction fees and quick settlement, should appeal to merchants, remittance providers, and, consequently, almost anyone making payments.

Will regulators get on board?

As Bakkt’s application for regulatory approval shows, it’s hard to gain wide acceptance without legal certainty.

In October 2018, the UK released its Cryptoassets Taskforce: final report, which summarizes the UK’s policy and regulatory approach to cryptoassets and Distributed Ledger Technology (DLT) which is another coinage for blockchain. Some of the conclusions of the task force include:

  • Bring all relevant firms into anti-money laundering and counter-terrorist financing (AML/CTF) regulation
  • Go significantly beyond the requirements set out in the EU Fifth Anti-Money Laundering Directive (5AMLD), including preventing various anonymous crypto transactions
  • Asking the UK’s financial regulatory body, Financial Conduct Authority (FCA), to take on a supervisory role with regard to cryptoassets

The FCA recently released Guidance on Cryptoassets, a consultation paper. It focuses on where cryptoassets interact with the jurisdiction of the FCA, including when cryptoassets would be considered ‘Specified Investments’, ‘Financial Instruments’, captured under the Payment Services Regulations (PSRs) or the E-Money Regulations (EMRs). If operating in the UK, it’s vital to understand the different classifications (exchange, security or utility tokens) and what rules apply.

Another interesting regulatory development took place, thousands of miles away – in Wyoming. A new bill, known as SF0125, was approved by the Wyoming House of Representatives, and is expected to be signed into law by the Governor. This bill recognizes cryptoassets as property. By providing legal clarity on the matter and reducing an element of risk, it makes it easier for crypto companies to operate in the state. It also enables individuals to more easily purchase the asset as possessing property is well defined in legal precedence and doesn’t require special handling, as would be required if the assets were defined as securities.

Caitlin Long, co-founder of the Wyoming Blockchain Coalition, states “it truly gives the blockchain industry something I think it needs, which is legal clarity to bring it to the next level, and even the bitcoin purists who would be opposed to intermediate [entities] being in [charge] would take comfort in knowing they now have legal status for their assets.”

These are just two cases where regulators are clarifying the specific rules around the industry. In the last few weeks, Bahrain, Russia and the Philippines have moved forward with cryptocurrency regulation bills. As regulators become more comfortable with assessing the industry, and jurisdictions around the world put in regulations, it’s becoming clearer what obligations are necessary and what protections investors can expect.

As we quoted Bill Gates almost two years ago in an introductory post about blockchain, “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.” The crypto winter has taken a lot of hype out of the market, but, meanwhile, development has continued on and regulators have been taking steps to protect the market. Now, perhaps, the building blocks are starting to be put into place; this could well be the beginning of a new era in crypto.