1 Executive Summary
Cryptocurrencies are a decentralized alternative to fiat currencies and have the potential to disrupt the current financial infrastructure. Cryptocurrencies are defined by the European parliament as a digital currency that is protected through cryptographic means, is decentralized, and is independent of any central bank.[^1] The inherent structure of cryptocurrencies offers strong advantages over the current means of financial transaction including auditability and cost savings, but critical weaknesses remain that would prohibit widespread adoption if not addressed.
The negative aspects arise from its actual usefulness as a currency. The vast majority of existing cryptocurrencies experience extremely high volatility, which effectively eliminates their usefulness as a means of exchange and silos them as a speculative investment. Securing a user’s reserve of cryptocurrency remains an issue; in general, the more user-friendly the wallet and payment process is, the less secure a user’s reserve is. There are legitimate concerns regarding money laundering and terrorist funding through cryptocurrency exchanges due to the pseudo-anonymity of users, as well as being at odds with data privacy compliance. There is also the risk that speculative cryptocurrency trading is already a bubble, and a large hack or unsuccessful launch of a new crypto product could trigger its collapse.
Cryptocurrencies have a market capitalization of 262.3 billion USD as of August 2019.[^2] The peak was at 769.4 billion USD in January 2018, but since then the market capitalization sunk into a trough and has slowly been on the rise again to its current value. Bitcoin drives the industry, comprising approximately 70% of the industry market capitalization. The unique positive aspects of cryptocurrencies come from the underlying technology – blockchain. On public permissionless blockchains, cryptocurrency transaction can be accurately recorded in a tamper-proof way and can be audited by anyone. The identities of the transacting parties are pseudo-anonymous, which protects the real-world identities while verifying the amount and ownership of the transaction.
The multitude of actors that stand to be affected by cryptocurrencies are taking active roles to shape its further development. The most proactive and potentially disruptive is the payment services industry in which cryptocurrency developers are most active. Their main goal is to trigger mass adoption of cryptocurrencies and revolutionize retail payments. Legacy financial institutions take a different approach by developing blockchain and tangentially cryptocurrency solutions for trade finance. Regulatory restrictions prevent financial institutions from taking risks in regard to cryptocurrency. The national and global regulations are under constant revision, and some countries like China and Saudi Arabia have banned them entirely.
There is a wide range of applicable uses for cryptocurrencies, and the depth of their impact will be driven by the level of consumer adoption. Globally, there is potential to add millions to a connected cryptocurrency network, which would widen and legitimize the gig economy. If widespread consumer adoption is achieved, the impact would be felt by retailers, business purchasing, financial regulators, and public institutions. The greatest chance to have widespread adoption of cryptocurrencies will come from the launch of Facebook’s Libra as early as 2020.
This report details the strengths and weaknesses of cryptocurrencies, as well as their current usability. It then contextualizes the actions of payment service companies and financial institutions with the global regulatory landscape. Then the global implications of widespread adoption are explored. The future of cryptocurrencies has the potential to be incredibly disruptive, and it is in every industry’s best interest to remain informed on the developments of this emerging technology.