Bitcoin and cryptocurrencies–and by extension their underlying blockchain technology–have gone through a series of narrative shifts since bitcoin was launched in 2009.
Originally, crypto was primarily considered to be a payments technology that would free people from multi-day waits for settlement, eye-watering fees, and the legacy systems of big banks.
As financial technology (fintech) companies solved many of these problems without using crypto or blockchain, the idea that bitcoin could act as a store of value, comparable to digital gold or even virtual real estate replaced the payments narrative.
Futurists theorised that smart contract blockchains pioneered by the ethereum cryptocurrency could serve as a foundation for a decentralised internet that became known as web3–championed by the likes of sprawling Silicon Valley social media giant Facebook (now rebranded to Meta to reflect its metaverse ambitions) and technology investment tastemaker Andreessen Horowitz.
Many of these heady ambitions have come crashing down following the latest cryptocurrency crash that has wiped around $2 trillion in notional value from the crypto market–plunging the crypto industry into a full-blown financial crisis. But out of crisis comes opportunity. The practical payments narrative has reemerged, ushering in the era of stablecoins–cryptocurrencies pegged to traditional currencies or real-world assets.
Stablecoins, first coming onto the scene around 2014, were developed as an on-ramp to the cryptocurrency market. Stablecoins, which can be pegged to all manner of traditional currency or real-world assets such as commodities, grease the wheels of the crypto ecosystem, providing liquidity for exchanges, helping move assets between platforms and across geographic jurisdictions that may have regulatory or technological barriers to the traditional financial industry. Some maintain their pegs via an issuer holding the underlying asset in reserve while other, more experimental stablecoins are pegged “algorithmically,” using trading arbitrage to hold their price. CBDC development: China has already launched its digital yuan, amid accusations that it will enable further authoritarian control over the country The US is exploring the development of a digital dollar but the Federal Reserve and the Treasury are taking a wait-and-see approach The European Union has begun working with the central banks of its member states on a digital euro and expects to start working on a prototype at the end of 2023 The UK has said it wants to become a “global hub” for crypto with the Bank of England developing plans for a CBDC dubbed Britcoin and is set to deliver a consultation paper at the end of the year Largest stablecoins:
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Waking up from a woozy web3 fever dream to a digital payment reality
Beginning in late 2020, amid a blistering bitcoin price bull run, the cryptocurrency space became increasingly detached from reality and enamoured with the intoxicating dream of a decentralised, utopian digital future.Fueled by soaring crypto prices, the idea that nouveau riche crypto entrepreneurs could reshape the internet from its current Silicon Valley-centric web 2.0 form into a more user-focused web3, eclipsed existing real-world crypto use cases—chief among them digital payments.
Payments were this month named by the chief executive of crypto exchange FTX Sam Bankman-Fried–branded crypto’s “lender of last resort” for his bailouts of distressed crypto companies–as the first of three “potential use-cases for crypto.” In a detailed Twitter thread, Bankman-Fried disregarded the use case that made him a billionaire—that “you can buy tokens and maybe they'll go up.”
As the crypto bubble deflates and governments, central banks and regulators try to balance innovation with better investor protection, the traditional financial industry is sifting through the rubble of the crypto crash for discount gems.
“Wall Street and the City will look to buy during the crypto winter,” said crypto expert and senior associate at legal firm Rosenblatt Tom Spiller, speaking over the phone and pointing to the news last month that Goldman Sachs is looking to raise $2 billion from investors to buy up distressed assets from bankrupt crypto lender Celsius, a victim of the fallout from the Terra luna meltdown.
This year’s crypto crash was partly triggered by the collapse of the Terra blockchain ecosystem, made up of the “algorithmic” dollar-pegged stablecoin terraUSD (UST) and its support coin luna. UST was designed to maintain its peg to the dollar by promising that one UST could be redeemed for $1 worth of luna.
When the system failed and value of both UST and luna fell to effectively zero, regulators who had long been eyeing stablecoins had their motivation to act.
An opportune moment for regulation
In the aftermath of the Terra failure, the UK Treasury proposed an insolvency regime to manage stablecoins if they collapse, with the Bank of England potentially taking over failed stablecoins that are deemed to have systemic importance to the financial system.
Similar proposals have been made elsewhere, including in the US. Just this month, the UK’s top financial regulator, the Financial Conduct Authority (FCA), said the US and the UK will deepen ties on crypto regulation.
“We are demonstrably supporting responsible use cases for the underlying technology while ensuring it is not at the expense of appropriate consumer protection or market integrity,” the FCA’s chief executive, Nikhil Rathi, said during a speech at the Peterson Institute for International Economics, outlining the FCA’s crypto regulatory goals.
Former chancellor and possibly the UK’s next prime minister Rishi Sunak has said he wants the UK to become a “global hub” for crypto, promising to “seize the capitalist energy which has already made UK financial services what it is [and] use it to unleash the potential of crypto-technologies.”
Sunak, a former banker who last year proposed the UK develop a national stablecoin, known as a central bank digital currency (CBDC) and dubbed Britcoin, turned heads in April by commissioning the Royal Mint to issue a blockchain-based non-fungible token (NFT)–a form of digital collectible that rocketed in popularity last year as part of the web3 fever dream–as “an emblem of the forward-looking approach the UK is determined to take.”
The Bank of England is developing plans for its own retail CBDC and will deliver a consultation paper at the end of the year.
"The benefits are clear, digital assets and digital currencies including CBDCs make our economy more efficient, allow access to broader financing options, reducing the risk of fraud and strengthen the anti-money laundering efforts of the governments involved,” Martin Hiesboeck, head of blockchain and crypto research at crypto platform Uphold, said in emailed comments.
“The losers will be those companies who do not comply, who insist on keeping crypto opaque and unsupervised; winners will be companies who stress the importance of utility, real-life economic use cases and financial inclusion and adoption of crypto and blockchain.”
Getting the balance of regulation right
Last month, Tether, the company behind the $65 billion tether stablecoin, launched a British version to capitalise on the UK government’s desire to make Britain a global cryptocurrency hub.
“There is room in the space for both private stablecoins and CBDCs and it will result in more collaboration than competition,” Paolo Ardoino, Tether’s chief technology officer (CTO) who also serves as the CTO of the cryptocurrency exchange Bitfinex, wrote to ICAEW. “I think the government will realise that stablecoins are much better tools than standard banking protocols.
"Currently, the entire banking system relies on outdated technologies, so stablecoins have been a way to modernise it in a few quick steps. I expect that 10 years from now, the technology layer being used by banks will be phased out and replaced with more advanced rails.”
However, the crypto industry is fearful that heavy-handed regulation will stifle innovation and entrench the traditional financial industry as financial watchdogs look to protect consumers from risk.
“Some regulations will be too bank-centric and detrimental to the crypto industry,” said Nicholas Du Cros, head of compliance and regulatory affairs at digital asset manager CoinShares, speaking over the phone and warning the tone of the conversation has changed since the implosion of the Terra ecosystem. “Pushing the crypto world toward regulation will be a protective moat for the banking industry.”
The question regulators are grappling with is “how you can act as a regulator without killing innovation, disruption and acting as a barrier to market access,” Denisse Rudich, a crypto regulatory expert and the chief compliance officer at tech platform ElementaryB, told ICAEW.
The long-term consequences of the latest crypto crash shouldn’t be downplayed. "The analogy for me is the dot-com boom, when $5 trillion was wiped off values," Bank of England deputy governor Jon Cunliffe said at a conference last month in comments reported by Bloomberg. "A lot of companies went, but the technology didn’t go away. It came back 10 years later, and those that survived—the Amazons and the eBays—turned out to be the dominant players."
Those future “dominant players" are looking to develop real-world utility for cryptocurrencies that breaks away from the kind of bubble-inducing speculation that puts investor funds at unreasonable risk.
“Payments could become prominent again,” said Rosenblatt’s Tom Spiller–and it’s not just banks that will push the crypto payments use case forward. “Stripe [a major digital payments processor] and Twitter are going to be big on using crypto as a payments service.” According to Spiller, crypto is just “payments and funny online communities for rich people.” But, “that's still a good thing.” It means “the web3 dream may still exist”—it's just been put on hold.
The Bank of England declined to comment on its plans and the UK Treasury did not respond by the time of publication.