Disrupting the disrupters: The race to mainstream the $3.6tr crypto universe

Around the world central banks and financial regulators, including the Reserve Bank and the Australian Securities and Investments Commission, are looking at how to respond to the proliferation of crypto assets and the increasing number of their citizens holding or trading them.

While there is a particular interest in cryptocurrencies like Bitcoin and stablecoins like Tether and the threat they might pose to central banks’ monetary policies and traditional banking systems – to the point where central banks are rushing to develop their own digital currencies – within the $US2.6 trillion ($3.6 trillion) universe of crypto assets there is a host of developments that could improve the efficiency of financial systems and outcomes for customers.

When the regulation comes it is likely, because of the intensity of the analysis and research being devoted to it now, to come in a rush.

A recognition within mainstream finance that the digitisation of finance and financial assets and their acceptance by institutions and individuals can only increase – it is estimated that more than 200 million people globally have an exposure to crypto assets, including more than 600,000 Australians – means that the focus of regulators and legislators has shifted from scepticism, to concern, to begrudging acceptance.

The decision by the Commonwealth Bank a few weeks ago to allow its customers to hold and trade Bitcoin and other crypto assets, becoming one of a handful of banks in the world to do so, marked a significant moment for the acceptance of crypto assets not only in this market but globally.
Institutional investment is not quite pouring into the sector but it is occurring and some of the biggest banks in the US are developing proprietary platforms to support the trading and holding of crypto assets by their customers.

The shift from hostility and rejection of crypto assets – both because of the potential competitive threat but also the potential for breaches of the draconian anti- money laundering and terrorist financing laws – to a cautious embrace of the sector by the finance establishment in turn means that there is an increasingly compelling need for crypto assets to be included in banking and finance regulatory frameworks.

While that would be an anathema to the libertarians, anti-authoritarians, anarchists, tax evaders and criminals who were the early adopters of cryptocurrencies, a sound set of rules that enabled banks and other licensed institutions to operate in or around the crypto space would legitimise the assets and, by making the sector safer, easier to access and more transparent, bring it into the mainstream of financial activity.

In the long run the increased credibility and the increased access to investment funds would be a positive for those crypto promoters with something innovative and useful to offer, although it might not be as positive for those crypto assets/currencies that are purely vehicles for speculation.

It would also somewhat level the playing field between the unregulated cryptos and the intensely-regulated banks and other financial institutions who can see the crypto sector starting to make inroads into what have been traditional banking activities, from payments (particularly cross-border payments) to peer-to-peer loans and deposits using blockchain technologies to decentralise and disrupt financial activity.

The legislators and regulators’ interest in crypto assets has accelerated this year, ironically fuelled by Facebook’s yet-to-be-realised ambition to issue its own stablecoin, along with China’s piloting of a digital yuan and the rapid growth in decentralised finance activity.

When the regulation comes it is likely, because of the intensity of the analysis and research being devoted to it now, to come in a rush.

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The disrupters will be disrupted but the payoff for the crypto promoters and their investors should be greater credibility, enhanced access to investment dollars and inclusion within the mainstream of financial activity.

While there are those within the crypto community who would be horrified at the prospect of being “mainstreamed,” that wouldn’t be a bad trade-off.