Three trends we’re watching for 2020
With a rapidly-growing industry sector and a corresponding increase in the understanding of its basic principles, we’ve seen less extreme volatility and growing acceptance that a new technology-driven field of endeavour is emerging.
Given the pace and scale of change, what trends can we expect to dominate the space next year? Here are three broad, interlinked trends we see as moving the cryptocurrency world forward in the next twelve months.
Decentralized Finance (DeFi)
Put simply, DeFi involves recreating existing financial products in a decentralized format. Unsurprisingly, Bitcoin and Ethereum are the templates – tradeable assets with no central control, running on large computing networks.
Reengineering financial products as Dapps on blockchains may recreate banking services through products like stablecoins: tokens linked to a basket of real-word assets like the US dollar with the advantage of being more transparent and resilient than their analogue counterparts. Others leverage peer-to-peer networks to create lending platforms without the intervention of an intermediary, cutting costs and raising efficiency. More advanced financial instruments using smart contracts may include derivatives and structured products, appealing to sophisticated market participants.
At OAX we see ourselves as a participant in this trend. Like us, most if not all early DeFi products are built on Ethereum; in addition, many are hybrids which leverage the strongest features of blockchain technology in combination with traditional market structures to create innovative, user-friendly products and services.
It comes as no surprise that we can expect to see increasing regulation, not just in the next year but in the years to come as digital assets continue to gain foothold and find more applicable uses in the larger financial landscape.
In the U.S. the long-running debate between the SEC and market participants as to whether digital assets may be financial securities will continue into the new year in the form of a court case around Kik’s $100m ICO of its Kin token in June 2019. In the EU, new finance commissioner Valdis Dombrovskis promised new legislation to ensure a common approach to fairness and investor protection in crypto transactions, while in Japan, from April 2020 onward crypto exchanges will manage users’ money separately from their own cash in segregated accounts. By 2020, German banks will be allowed to store and sell cryptocurrencies under the Fourth European Money Laundering Directive. Meanwhile, regulators in Hong Kong and Singapore (SFC and MAS respectively) also addressed their intent to bring the digital asset industry under its regulatory umbrella, as highlighted by the team in our previous Fintech Week review.
While the urge to protect participants and ensure fairness is sound, new kinds of asset and methods of transacting require new ways of regulating. The key will be finding ways to regulate markets based on technology which is designed to be subversive (cryptography) – without stifling innovation.
As Professor Syren Johnstone states in his research paper [link]: “Establishing a sustainable regulatory approach is complicated by features of CCTech still undergoing transformational evolution that pose novel challenges to regulatory policy making and raise fundamental questions about what regulatory oversight might look like, and to what it should attach.”
What’s certain is that appropriate regulation will greatly enhance the extent to which our third 2020 trend progresses.
Greater uptake by institutions
JP Morgan CEO Jamie Dimon’s attitude toward cryptocurrencies has changed from dismissing them as “a fraud” in 2017 to announcing the bank’s own JPM Coin in 2019. This echoes many large financial institutions’ change of heart as the global giants start to look for ways of getting involved.
But large institutions face a chicken-and-egg situation when it comes to cryptoassets. While many acknowledge the potential for attractive investor returns, they require cryptos to overcome their notorious price volatility (often a function of low liquidity); demonstrate better scalability so they can be traded in size; and be subject to regulation that satisfies the dictates of their own regulated status. If these factors are satisfied, banks’ participation will grow; with greater participation comes greater scale, more liquidity and less volatility.
The introduction of more regulated custodial services and investment vehicles like ETFs point to improving conditions for institutional interest. But it could be governments’ introduction of Central Bank digital currencies (CBDCs) that finally show the way – although 2020 may be early for the first of these to appear. Many are watching China after its statement that it may launch its own digital currency. Such a currency, backed by one of the world’s largest economies, would become an immediate safe haven asset – and with predictions continuing economic stagnation in the coming year, could be attractive to institutional investors.
In the fast-moving world of cryptoassets and blockchain, future predictions may not survive long into the future, and we can be sure that 2020 will throw up some unexpected developments too. We’ll be in the middle of it all as the year unwinds – watch this space for more.