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The aim of this article is to discuss cryptocurrencies’ future and consequences. It is a debate’s opening where HNFC would be pleased to hear your comment, views and opinion as long as it is constructive, justified and mature.
If one word should remain in our brain for the year 2017, « Bitcoin » or “cryptocurrencies” are the leaders. The apparition of disruptive technologies in the very old, established and important sector of currencies marked our year historically. The enthusiasm around it is justified as we are witnessing an historic event.
But, the question everyone is asking, from the crypto-miner in front of his laptop to the chairman of the Federal Reserve, is: Where does this lead us? The question for a million Dollar.
Answering to the ultimate question of the crypto-currencies’ future asks me to design realistic scenarios for the near future. To do it, I have to build my scenarios on the modification of a relevant parameter. Amongst all others, I decided to choose the regulatory parameter for two reasons:
With this criterion, I can build two relevant scenarios which are binaries: regulation or not. As those are extrema and opposite hypotheses, they define a spectrum, a range, where the future should be. The process of building scenarios will consider causes and economic consequences of each.
Hypothesis one: No regulation of cryptocurrencies
In this case, governments and monetary authorities would understand Bitcoin fanatics and every cryptocurrencies’ supporters. They would trust the big players of the crypto-system and their cause. Thus, these new currencies would be left in a pure liberal system as many crypto fans were and are asking (see the Banking Bitcoin documentary). However, this decision implies a lot of statements.
In a first time, leaving the cryptocurrencies’ sector unregulated means to accept its economical and legal existence. This situation would create three major consequences:
Hence, on the short term, integrating cryptocurrencies in their current form is a synonym of abandoning the contemporary financial system that we have been building for decades. This decision will cause a crisis on the politic and economic plan.
But, to mitigate the downside of this decision, cryptocurrencies’ supporter would say this crisis is the price to pay to get rid of the current unfair financial system and create a new one, which is decentralized, innovative, democratic... But are these enumerated benefits real?
Establishing an unregulated sector for cryptocurrencies is accepting the exposure of retail and institutional investors/users to a high level of risk, as those currencies are highly volatile, with no protection. Savings lost in the Bitcoin will be lost entirely, no matter which reason, amount or level of competence of the investor/user.
It is also accepting a system where the opacity of the block chain can be easily used for illegal transactions, money laundering and off balance-sheet operations (easier than in our classic banking system).
Cryptocurrencies are not a new future. Actually, it is coming-back to our old, volatile, instable and opaque financial system. Admitting cryptocurrencies is rejecting the regulation that many people were asking after the 2008 financial crisis for example.
Hence, to not regulate cryptocurrencies is admitting the obsolescence of our financial system which would bring an economic and politic crisis for no real benefits/advantages/changes over the long term.
Hypothesis 2: Regulation of cryptocurrencies
The opposite of Hypothesis 1 is to regulate the cryptocurrencies’ sector. There are many reasons to do so. Firstly, the growing size of the market and its relative importance. Then the possibility of fraud and other financial crimes. Also, the volatility and risk it can represent for users and investors…
Regulation and cryptocurrencies are by essence opposite. The regulation tries to control, watch and provide transparency while those currencies are built with the exact opposite goal.
For example, if we look at the reason of being interested in a cryptocurrency, I would mention four of it: its decentralization (no central control), its opacity (no name mentioned, just code blocks), its volatility (possibilities of making/losing money quickly) and accessibility (just an internet connexion and a crypto wallet).
Those reasons of the cryptocurrencies’ growth are targets for regulatory projects. Financial ministers and regulators from the world want more transparency on transactions around cryptos for instance, or want to limit the access to digital currencies to authorized people.
Thus, to regulate cryptocurrencies is making them useless therefore worthless. What are the plausible consequences?
To define the range of consequence, the question to answer is: How big is the cryptocurrencies’ sector and how much it is linked to our economy?
According to coinmarketcap.com, Bitcoin represents 276 008 868 175$ on the 7th January. Ethereum is 109 224 744 936$, Ripple is 130 125 949 715$. The top 3 biggest cryptocurrencies, in terms of market capitalisation, represents 515.357 Billion USD. The Top 6 is 615.75 Billion. No total market cap of cryptocurrencies is available as they are cryptocurrencies launched every week. On the 27th November, there were 1324 cryptocurrencies available on the internet. In one month, this figure grew up by 57.
To those figures, we have to add the value of financial instruments linked to cryptos. There are derivatives issued with cryptocurrencies as underlying since the CME and CBOE decision to launch crypto derivatives. It signifies that there are more and more investment opportunities available around this sector. 2018 may see the appearance of Crypto ETFs. All of these securities would eventually be bought by banks, funds and investors (institutional or retail).
The cryptocurrency sector is big, but ridiculous for the fixed income market for example. The difference is that, in one year, it grew up by roughly 3200 % (Motley Fool).
Then, the point where we should really worry is the progressive permeability between the cryptocurrencies’ sector and the “regular” business world.
Firstly, there are companies raising capital in crypto-currencies with ICOs (Initial Coin Offering).
If the capital raised is non-significant (relatively to the size of top public-offered companies), the problem is that they interact with real economical actors. Those ICOs’ companies buy, consume, and have creditors, suppliers and customers. No statistics are available to seize the integration level of those companies backed by cryptos and it is a problem. Because in case of regulation, the capital of those companies will be affected as their counter-parties.
Secondly, in the other way, there are companies (from the “regular” business world) taking the initiative to invest themselves in cryptos. Google and Overstock are among the biggest investors in the block chain and digital tokens. In addition, we have seen more and more companies accepting cryptos as payment, signifying they have treasuries in cryptocurrencies (thus an exposure to cryptos’ volatility). No data are available to treat this problem.
Hence, to regulate cryptocurrencies is admitting that a huge amount of money relied on nothing but a speculative bubble and bursting it.
However, consequences of such a decision are not clearly evaluable for the moment, and if it is the case, it is surely not a good indicator.
If something should be remembered from my two scenarios is that the crypto industry’s future depends directly and completely on the regulatory parameter. So, we have to closely watch the moves from governmental institutions.
Finally, the darkness of the sector, its quick and unmeasurable growth complicate the task of gathering data. Because of this lack of information, there is, actually, no preferable option for the moment.
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Written by Samuel Chaineau│ Co-founder of HNFC
Edited and Corrected
by Vee Venski
This article is not a promotion of financial investment. Investing money in financial instruments is risk-reward process. Losses and gains are part of financial investment process. Only invest money you can afford to lose.