How crypto has infiltrated the mainstream 

By Natalie Dempster, Head of EU Research and Macro Policy Lead & Chanice Smith, Account Manager

If you hadn’t heard much about Bitcoin this time last year, you probably have now. You might even have heard of its younger cousin Ethereum, an alternative digital currency which has more than doubled in value over the last few weeks. Whether you are a Bitcoin fanatic or sceptic – or it all just goes over your head – it is impossible to ignore crypto’s latest stint in the spotlight, or what this means for the future of money.

No longer reserved for the IT bods or shady activities, it is possible for anyone to legitimately participate in cryptocurrency – not least the institutional players that are largely responsible for Bitcoin’s spectacular price action over the last eight weeks.

January saw Bitcoin rocket to an all-time high of $40,675. As big names like JP Morgan and Mass Mutual flocked to invest, this elusive coin earned its place among the headlines of every mainstream news outlet, from the red top tabloids to all the serious financial papers.

However, this coverage wasn’t all positive, and rightly so. News of hackers stealing assets seems to be never-ending and, as demonstrated by the German programmer who forgot his password and got locked out of his $220m fortune, crypto still has some fundamental security issues to address. For the environment-conscious, the University of Cambridge last year found that maintaining the global Bitcoin network accounts for 0.25% of the entire world’s electricity consumption – more than the entire nation of Switzerland uses each year. Most importantly for sophisticated investors, Bitcoin is still a volatile asset.

The last comparative Bitcoin bull run of 2017 showed the price is still subject to sharp and unpredictable movements. Experts have prophesised about when the current bubble might burst. Others have asked if we’re actually in a bubble at all or whether we’ve now found the floor, since the institutional players with skin in the game are unlikely to let its value to drop to an unprofitable level.

At the end of January, governor of the Bank of England (BoE), Andrew Bailey, weighed in on the debate during a Davos seminar. He called time on Bitcoin and its unstable store of value but hailed the future of stablecoins. Stablecoins are a type of cryptocurrency with their value linked to a fiat currency, or other commodities, so their value is defined.

Bailey said it is “right to debate stablecoin and central bank digital currencies” in the future of money, pointing towards Facebook’s own US dollar-backed stablecoin, Diem (formerly Libra).

While the business model might not yet be fully realised, Facebook is steps away from launch. With 2.7bn active monthly users, the network effect of a Facebook currency would be huge and immediate. It has the potential to fundamentally change banking as we know it.

The BoE itself is considering launching its own digital currency, depending on the results of a HM Treasury consultation into the approach to cryptoassets and stablecoins, launched last month.

Similarly, the European Commission last Autumn launched a comprehensive legislative proposal for the regulation of crypto assets, with a focus on stablecoins. In the US, Biden’s appointment of former Commodity Futures Trading Commission (CFTC) chairman Gary Gensler as head of regulator the Securities and Exchange Commission (SEC) is a clear statement of intent to place digital currencies high on the new administration’s agenda.

These actions from senior, central authorities mark a clear shift in sentiment toward crypto. As appetites, interest and regulatory buy-in grows, it wouldn’t be a surprise if the headlines soon read: “Crypto is coming to a bank near you.”

For more information about cryptocurrency or digital assets, please contact a member of the team below.

This piece first appeared in Cicero/AMO’s February news and insights update – click here to access our full update.

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Jeremy Swan

Chief Executive

Natalie Dempster

Head of EU Research and Macro Policy Lead