It’s Now or Never if crypto is to be a three horse race

Over the last several years, tokenized crypto projects have come to the fore amid a growing belief that the technology represents the next wave of innovation in finance. The success of the public crypto chain startups (e.g., Bitcoin, Ethereum) has forced pretty much everyone else into the game, and both central banks and tech firms began developing their own solutions.

After a brief period where it looked like the center of gravity in global finance could meaningfully shift, it now appears that there is a clear leader in a three horse race, and things will need to change if public crypto is to become the true disruptor they set out to be; otherwise, they could just fade away.

Public Crypto Chains

Bitcoin, Ethereum and other next generation chains continue to evolve. We’re seeing a series of new features such as distributed exchanges (DEX), better transaction scalability, stable coins, and a shift from the energy-intensive Proof of Work (POW) model for transaction validation toward the more efficient Proof of Stake (POS) approach. These and other changes further validate public crypto as a concept, as well as prove the public crypto firms’ ability to evolve and solve for their shortcomings.

However, there remain plenty of prominent skeptics who, despite the changes and growing popularity of public crypto, hold firm that it’s a scam with little in the way of long-term viability. The skeptics point to significant shortcomings that remain – the lack of broad adoption for crypto payments, the challenges of self-custody of crypto assets, and the lack of an FDIC-like deposit insurance, among others – as major hurdles for broad adoption of the technology. And while recent Fed activity has sparked discussion in economic circles about the relative value of virtually-limitless fiat currency vs. the comparatively constrained crypto supply, the fact that institutional investors – who are the ultimate arbiters of an asset’s utility – have largely remained on the sidelines serves as the largest indicator that public chains still have a ways to go to truly arrive.

Tech Firms

When Facebook announced its intention to create its own currency – Libra – it created quite the stir, grabbing the attention of both the financial services sector and government authorities. An organization like Facebook, with billions of users and a mountain of capital, could certainly come up with some creative use cases for its own currency, and there is good reason to believe it could gain wide-scale adoption. It didn’t take long for the authorities to act, and Facebook was quickly forced to change course as new rules were enacted, most notably a requirement that Facebook develop multiple single-currency coins for each jurisdiction rather than having a single, multi-currency coin.

Facebook wasn’t the only firm to run into regulatory roadblocks: when Telegram created its Telegram Open Network (TON) and Gram tokens for their hundreds of millions of users, regulators – this time the SEC – once again stepped in to put the brakes on things. After initially raising $1.7 billion in capital, they were forced to abandon the idea after losing to the US Government in court.

Rumors of other big tech firms getting into the token game continue to circulate, but seeing what became of Facebook’s and Telegram’s efforts, it’s clear that they will need to do so in collaboration with – not opposition to – government regulators if they want to make meaningful headway.

Central Banks

That leaves governments and central banks who, as guardians of the status quo, actually have a commanding advantage in terms of capital, public trust, and regulatory influence, among much else.

China is the big news among government contenders with its rapid development of a central bank-issued digital currency and the complete shutdown of public crypto inside China. The People’s Bank of China is now testing infrastructure for a digital currency with plans to go live in 2022, and rather than try to curb competition, they’ve engaged it: Chinese tech firms are active participants in development and testing. Not only does this help quell competition, the inclusion of technology players all but assures that the infrastructure will have applicability beyond China’s borders.

Payments appear to be the first use case, but it certainly won’t be the last. Once that core infrastructure is built and payment practices are vetted and operationalized, one can easily see it expanding to cover capital markets and digital assets in general. 

As the details come out, the financial media is starting to wonder openly whether China’s digital infrastructure will be the vehicle that allows it to overtake the United States as the world’s reserve and dominant payment currency. Other governments have taken notice as well, and several other central banks are now openly discussing creating their own digital fiat currencies. 

It’s Now or Never

Not too long ago, tech firms, public crypto chains, and governments were in a legitimate three horse race to decide how digitization might re-shape global finance. But unlike other sectors, the financial services industry is not as easily disrupted: governments, central banks, and regulators are powerful protectors of both the public interest and the status quo, and they’re proving much harder to disrupt than, say, the transportation (Uber) or hospitality (Airbnb) industries. If tech firms or the public crypto chains want a seat at the table, they need to get better horses in the race – and soon.

The opinions expressed in this document are those of the author, and do not necessarily reflect the views of Northern Trust.