By Bhavin Shah, Partner, Forensic Risk Alliance (FRA)
The cryptocurrency market is currently valued at $1.8 trillion, up from $193bn in April 2022 (source: https://coinmarketcap.com/charts/).
Retail investors have been keen to capitalise on its growth, embracing the volatile price swings in the hope of cashing in on the next big rally. Last year, Coinbase revealed that more than 56 million of its users accounted for $335 billion in trading volumes in Q1 2021, of which $120 billion were retail.
However, for all their enthusiasm, retail investors are relatively inexperienced compared to professional investors and not fully aware of the risks posed by cryptocurrencies. The media is partially to blame for this, failing to offer accurate depictions and propagating many myths. As a result, there are many misconceptions around cryptocurrencies, and these need to be addressed.
Perceived value vs utility
One common misconception is around crypto's real usage versus its perceived value.
We are currently going through a cycle where perceived value is more than its utility in day-to-day life. In other words, whilst the market views cryptocurrencies as highly valuable, usage remains low. Currently, only some sellers accept bitcoin or other cryptocurrencies as a form of payment, with the large majority sticking to conventional currencies.
This is surely changing fast. However it is important to understand it's not an 'either or' situation. Meaning, cryptos will not necessarily replace fiat currency in foreseeable future; rather it will be an alternate for conducting financial transactions.
Categorisation
For some time now people have been trying to put cryptocurrencies into a category, such as a commodity, security, asset class or currency. The reason for this is it allows them to be regulated, giving greater clarity for law enforcement and protection for investors.
However, the way in which crypto operates is fundamentally different to anything today: crypto doesn't work on a net-settlement basis like the traditional financial system - instead, it transfers value in real time.
Regulators therefore need to think about crypto in an entirely different way. Boxing it in frameworks that have existed for 100 plus years won't cut it. Each new cryptocurrency has a slightly different purpose and technical characteristic, so should be considered on a case-by-case basis and slotted into more than one category.
The future of crypto
Whilst it will take time for these issues to be ironed out, one thing is certain: the crypto economy (or 'cryptonomy') will become a part of our future. There are many signs today that support this, from the use of crypto in the metaverse, to the popularity of NFTs and the rise of central bank digital currencies.
Crypto's move to the mainstream will be accompanied by a massive cycle of consolidation and clean-up. Like the dot-com boom in the 1990s, some of the 30,000 plus cryptocurrencies, NFTs and tokens currently in existence will die and some will survive. This is not to say that cryptocurrencies are inherently bad or risky, but a sign of the market maturing.
The question of when the cryptonomy will become a part of our future will depend on regulatory policy. Australia's financial regulator, for example, recently announced that it aims to implement crypto regulation by 2025, whilst the UK and Brazil are likely to do so by 2024.
Dubai is further ahead, having already adopted its first law regulating virtual assets and issued virtual asset licences. The reaction from the global crypto industry has been extremely positive, with FTX, Binance and Bybit setting up shop in the country. The setup of the Dubai Virtual Asset Regulatory Authority (VARA) is also in line with the thinking of having a standalone regulator for virtual assets that works closely with the industry players in developing regulation for this ever evolving yet astronomically growing nascent industry.
Whilst the cryptonomy will become a significant part of the real economy in a very short time, it won't replace it. Instead, it will work alongside it and complement it where necessary. Governments, policymakers and institutions should take note and be prepared to adopt it.
Bhavin presents the Cryptonomy Talks series, produced by The Wealth Today and FRA. He is honoured as Young Global Leader by World Economic Forum.
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