The world is going through a period of social and economic upheaval. Governments around the world are responding in drastic ways, including printing incomprehensible amounts of fiat money as fiscal stimulus.
In the short term, says Tom Albright, interim CEO and director of Bittrex Global, these measures help boost the local economies and reduce the economic damage from the pandemic and other economic disruptions. However, unfortunately they also create long term consequences, as they diminish the value of money.
We are seeing tremendous interest in Bitcoin and other decentralised cryptocurrencies as consumers look to “digital gold” as a haven from inflation caused by money printing.
Satoshi Nakamoto created Bitcoin in 2008 to establish a digital currency that could not be controlled by centralised intermediaries such as banks or governments. Bitcoin offers an inflation hedge for one obvious reason: unlike fiat currencies, the supply is limited.
Only 21 million Bitcoins can be mined in total. There is no digital central bank that can debase the value by flooding the market. The decentralised nature means that the decisions of a few power-brokers cannot fundamentally alter the value of people’s holdings.
The signs are also positive for this trend to continue in 2020, with public support from well-known investors such as Paul Tudor Jones underlining investor confidence in digital currencies. The early signs are that investors are turning to cryptocurrencies both as a key tool of diversification and a hedge against uncertainties to come.
That is reinforced by data from the crypto asset manager Grayscale in Q1 it saw inflows north of $500 million (€426 million), more than doubling its previous best quarter. Almost a third of that capital came from new investors, most of them institutions. There is every indication that inflationary fears will add to the tailwinds that were already powering new investment in cryptocurrency, among them institutional involvement and improving regulation.
Innovative regulation sparks opportunities for the sector
At this time there is no universal standard for regulating blockchain technology and crypto assets. However, regulators around the world have taken multiple different approaches, from attempting to fit these assets into regulatory frameworks developed before the era of modern technology to creating entirely new regulatory frameworks.
Regulation in this space continues to evolve, and regulators that create clear well-thought out frameworks are attracting blockchain companies to their jurisdictions.
We are seeing regulators around the world take a bigger interest in digital assets as part of the maturation of the digital asset space. This maturation is driven by two mutually supporting trends. The first is the development of more robust regulatory frameworks, both in individual nations and trans-nationally.
A greater focus on anti-money laundering, Know Your Customer and asset protection is helping improve the sector’s reputation, and providing confidence for more investors to enter the space.
That is driving the second trend, the involvement of corporations and institutional investors. With institutions generally increasing digital asset allocations, and large tech companies like Facebook and Samsung working on cryptocurrency projects, we are starting to see both digital asset investment and infrastructure develop at scale, something we expect to accelerate in the next few years, driving overall growth in the market.
Why is Liechtenstein’s Blockchain Act so influential?
The Blockchain Act is a first-of-its-kind regulatory framework that addresses the needs of the industry in a particularly thoughtful way. By basing regulation of a token on the nature of the underlying asset, the Blockchain Act allows for a wide variety of underlying assets to be tokenised without complex legal workarounds. We believe this is a pioneering regulatory framework that will do much to encourage innovation in the space and is a model others are likely to adopt.
It is inevitable that more regulation will be implemented in this space, furthering existing KYC and AML measures that seek to offer consumer protection and verify the source of funds. We will also see regulators start to address more specific issues, such as whether retail investors should trade in crypto derivatives, something the UK’s Financial Conduct Authority has been deliberating.
Broadly we welcome the prospect of a more regulated sector. The potential of digital currencies can only be fulfilled by large scale adoption.
A regulatory environment which inspires trust from investors and institutions will provide the most significant flows of capital and so larger scale growth. Therefore regulation is a necessary part of the evolution of the market into a mature asset class that can support all types of investors.
When done right regulation can be a catalyst for innovation and we encourage regulators to work with the industry to ensure they are supporting rather than stifling innovators, as well as safeguarding the interests of consumers.
The author is Tom Albright, interim CEO and director of Bittrex Global.
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