For blockchain and its products, the last year has been one of dramatic momentum swings. Cryptocurrencies have been lauded one minute and pilloried the next; on the verge of apparent breakthroughs and then presented with major stumbling blocks. Notably, Facebook appeared to be closing on a major landgrab with the planned launch of its Libra coin, before a torrent of criticism saw several key partners, including payment behemoths Visa and Mastercard, back out of the project. While the Chinese Government, which had banned crypto exchanges in 2017, has recently given indications that it wishes to embrace blockchain and perhaps even launch a state cryptocurrency. Perceptions of blockchain have been swinging back and forth almost as violently as Bitcoin’s market value.
This confusion is not entirely random. In fact it tells us something about the direction of a market that is currently tiny in terms of capital flows, but potentially massive when viewed through the lens of future potential. Seen as a whole, the last year has been one of growing pains for blockchain and cryptocurrency. More specifically, it has been the year when we started to see the imprint of a catalyst that will be essential to the industry’s future: institutionalisation.
The very fact that two of the world’s most important governments, and one of the most influential technology companies, have started to focus on blockchain this year tell us something important. We are moving away from the first phase of blockchain’s growth, one that was defined by repudiation of the status-quo, seeking to create a new system in opposition to existing financial infrastructure. Now, an industry that has prided itself on decentralisation is encountering the reality that, if you want to move beyond early adopters to meaningful scale, then you cannot operate independently from the institutions that determine law, regulation and institutional flows of capital. What was once a guerrilla market is fast becoming an industry that is attracting both corporate and state attention.
Regulators are taking action
This can be seen through the lens of institutional investment, which boomed in the last year. Grayscale, one of the largest asset managers focused on cryptocurrency, announced last month that it saw inflows of over $600m in 2019, more than in the previous five years combined, and 71 per cent sourced from institutional investors. The signs are also positive for this trend to continue in 2020. A Fidelity survey of US institutional investors found that 22 per cent already have exposure to digital assets, and 47 per cent believe they have a place in their portfolios – with 47 per cent seeing them as an ‘innovative technology play’ and 46 per cent attracted by the low correlation to other asset classes.
It is not just investors who represent the growth of institutional interest in blockchain and cryptocurrency. Regulators and tax authorities are also taking action. This year, the most-commonly used tax form in the US will include a question about ownership of virtual currency for the first time. While last month saw Liechtenstein’s ‘Blockchain Act’ come into force. This is a pioneering regulatory framework that enables asset to be ‘tokenised’, then held and traded digitally: a process that previously required complex legal workarounds.
For some of blockchain’s early enthusiasts, these developments will never be acceptable. They see every fiat-backed stablecoin, every new piece of regulation and every institutional investor as a dilution of the essential purpose to create a radically new financial landscape. Yet this misunderstands the wider potential of the technology for the majority of consumers who want not financial revolution, but rather the next stage in evolution that gives them more control over their assets and more investment choices.
Cheering blockchain on
Blockchain and cryptocurrency will only reach that market – the only viable route to global scale – if the industry does what it has started to do more recently: harness the power of state and private institutions to create the accessible products, regulatory framework and capital flows that are the foundations of a trusted, functioning market. For blockchain to fulfil its potential as a transformative technology, leading the shift towards a world where digital assets are the new normal, it requires the certainty and infrastructure that only established institutions can provide. Mainstream financial markets must obey the law, they must follow regulation and they must provide a secure home for capital. These are the gravitational truths of capitalism, and they apply as much to cryptocurrency as they do to any other asset class.
That’s why those who want to see blockchain become more prevalent in the global economy should cheer the early signs of institutionalisation. This trend does far more to enable the potential of blockchain than it does to undermine it. Indeed it is an essential stage for an industry that is shifting from emergence into the early stages of maturity. It’s likely that in the years to come we will look back on 2020 as the year that blockchain started to grow up.
Stephen Stonberg, international business operations, Bittrex