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Cryptocurrency is undoubtedly going to be part of the future of finance, though how big a part remains to be seen.

The year 2021 will no-doubt be remembered as a pivotal moment in financial history — the year that mainstream and crypto finance finally converged.

The traditional banking and payments giants are now engaging with cryptocurrencies, as well as their underlying blockchain technology, at lightning pace. Markers of this change are everywhere, from crypto application programming interfaces (APIs) and the launch of crypto investment and wealth management offerings, to the successful public listing of crypto-exchange Coinbase. This convergence will have profound implications for the future of global financial markets and monetary systems. It also signifies a remarkable turnaround for crypto-markets, following the long ‘winter’ from 2017 to 2020, when many cryptocurrency prices plummeted. 

To the moon

For crypto enthusiasts, this represents a much anticipated market shift. The reasons underpinning the convergence story are complex, and a large part of this lies with the fiscal and monetary policies of national governments. In response to the Covid-19 pandemic, most central banks, which were already presiding over expansionary monetary policy regimes, turned the dial even further. Balance sheets have ballooned, while key interest rates have been pushed even lower. In tandem, unprecedented fiscal firepower has been unleashed to support ailing national economies; in the US, the total fiscal response has been equivalent to 27% of gross domestic product, according to Morgan Stanley.

The outcome of these measures, among other things, has been a rapid jump in total money supply. Between February 2020 and February 2021, M2 — a measure of money supply — in the US increased by 26%, the largest 12-month expansion since 1943. In tandem, asset prices have also inflated to the extent that the basic price-discovery function of equity markets is now being called into question. Against this backdrop of macroeconomic distortions and rising inflationary fears, it is little wonder that individuals and institutions have been searching out a hedge for their investments, or just somewhere to park their cash in a low interest rate environment. Cryptocurrency prices have, for the most part, soared in recent months. 

“The fixed supply of bitcoin means that theoretically, if nothing else, it looks like a perfect solution to the current mix of monetary and fiscal policies and inflationary concerns we’re seeing,” says David Mercer, chief executive of LMAX Group, a global financial technology company and institutional currency exchange. “On paper, it makes complete sense. Hence why institutions are taking a good look at it.”

In 2018, the group launched LMAX Digital, a dedicated institutional cryptocurrency exchange off the back of demand from existing institutional customers. Its story is indicative of what is happening across the wider crypto-market. “We traded more in the first quarter of 2021 than we did in the whole of 2020. So, the institutionalisation [of the cryptocurrency market] is well underway, but it’s a fraction of what it will be three years from now,” says Mr Mercer.

Becoming mainstream

Indeed, the biggest names in global finance are now pushing ahead with their ambitions in the realm of digital assets. In February 2021, BNY Mellon became the first global bank to launch a multi-asset platform to meet growing customer demand for digital asset solutions. Through its dedicated Digital Assets unit, the bank is developing a client-facing prototype that will offer a digital custody and administration platform for both digital and traditional assets.

“The fundamental point is that digital assets are becoming a part of the mainstream. It is an opportunity and, I would say, an imperative to work on this convergence [between digital assets and traditional finance]. We will support digital assets across our entire value proposition,” says Roman Regelman, chief executive of asset servicing and head of digital at BNY Mellon.

On paper, it makes complete sense. Hence why institutions are taking a good look at it

David Mercer, LMAX Group

As a function of these ambitions, BNY Mellon announced an investment in fintech firm Fireblocks — a digital asset custody, transfer and settlement platform — in March 2021. The move, which was part of a $133m funding round, values Fireblocks at close to $1bn, according to Reuters. Though the bank’s investments and partnerships with technology firms will be important moving forward, Mr Regelman points out that it is BNY Mellon’s reputation that will make the difference in the digital asset market. 

“We stand for trust, reliability and client support. That’s what people know us for around the world. I really believe that we are at the intersection of trust and innovation,” says Mr Regelman.

Indeed, mainstream financial institutions’ ability to leverage their reputations will be crucial in the widening digital asset market landscape. It may also pose an interesting challenge for existing players in the crypto space. As part of its S-1 filing in preparation for its initial public offering, the world’s biggest crypto-exchange, Coinbase, noted that “we do face significant competition from parties ranging from large, established financial incumbents to smaller, early stage financial technology providers and companies native to the cryptoeconomy”.

Democratising finance

Meanwhile, the growth of decentralised finance (DeFi) offers another compelling insight into the accelerating convergence of the crypto and traditional financial markets. DeFi is an alternative financial infrastructure — effectively a parallel financial market — that is built on top of the blockchain, the most common being Ethereum. It is a fully decentralised, peer-to-peer system that both replicates and reimagines the suite of financial products and services in conventional finance today by offering them (and more) through so-called smart contracts. These contracts are a set of instructions written in code that proponents say offer a more transparent and interoperable financial marketplace. 

The total locked value in DeFi — a measure of the total value of assets in the system — has soared over the past 12 months. In April 2020, this figure hovered between $700m and $800m; now, it is now more than $50bn, according to figures from DeFi Pulse. This growth trajectory has attracted the interest of Wall Street. “We are considering how we engage in DeFi. We need to consider how to engage there because in that space people also want trust,” says Mr Regelman. 

The rise of DeFi points to what is perhaps the most meaningful dimension of the convergence story between mainstream finance and the digital asset space: the use of distributed ledger technology (DLT). Though many of the highest profile cryptocurrencies are being adopted as the new digital gold, the growing adoption of these cryptocurrencies’ underlying DLT is an even more transformative moment for financial services. 

“When we talk about convergence, what we’re saying is that we think public programmable blockchains are an important, revolutionary technology pattern for the future. When it comes to public programmable blockchain technology, we think the world will converge around Ethereum,” says Simon Morris, chief strategy officer at ConsenSys.

Private blockchain

Today, some of the world’s leading private sector financial institutions and central banks are either deploying or testing DLT for a range of use cases. JPMorgan, HSBC, ING Group and Ant Group, among others, are all using the ConsenSys Quorum blockchain platform due to its private, permissioned use of Ethereum. 

“There is a material change in the landscape. Banks are starting to invest in infrastructure, not just point solutions, but actually investing in infrastructure. They are getting ready to start to use blockchain infrastructure to upgrade core parts of their underlying infrastructure and their underlying manufacturing infrastructure for financial products, as well as for responding to the demand that they’re hearing from their own customers for how they can get access to the crypto world,” says Mr Morris. 

cuy sheffield

Cuy Sheffield

Beyond the banking sector, payment giants are also stepping into the mix. Mastercard, for instance, was among the investors supporting a $65m investment into ConsenSys in April 2021, while also announcing a partnership as part of the company’s “multi-blockchain” strategy. Indeed, the convergence between crypto and traditional finance presents big payment groups with a sizeable set of opportunities and challenges. Most payments players are now addressing the ways in which they can position themselves in this unfolding story. 

“[Our approach to crypto] has definitely evolved in that a lot of what we do is driven by the demand and interest from our clients,” says Cuy Sheffield, vice-president and head of crypto at Visa. “So, as we saw an increasing number of our existing clients, fintechs and banks get more and more interested in this space, we really felt there was a huge opportunity for Visa to help them navigate it.

“We think that the line between fintech, crypto and banking is starting to blur. The crypto companies are adding payment products, and the fintech and banking groups are adding crypto products. We are excited to be a bridge inbetween and help both with the side that they are trying to expand into,” says Mr Sheffield.

Digital roadmap

In February 2021, Visa announced the expansion of its digital currency roadmap through a partnership with digitally native neobank First Boulevard. The agreement will see First Boulevard pilot Visa’s crypto APIs, which will permit customers to purchase, custody and trade digital assets held by Anchorage, a federally chartered digital asset bank. 

“Visa already has relationships with financial institutions and neobanks across the world; we’re already helping them with payments. But how can we provide other services that help them engage customers and grow their business? We think crypto is one of those services and so that’s where we have invested in making this capability available. We plan to enter a start-up pilot with them this summer and look at how we can expand this capability to other markets and other clients later this year,” says Mr Sheffield. 

Meanwhile, in Europe, payments giant Nets Group is now facilitating cryptocurrency payments in retail outlets and restaurants across Austria in partnership with Salamantex, a software solutions specialist for cryptocurrency payments. Consumers can pay for goods and services using bitcoin, ether, dash, litecoin, stellar or XRP, either in a direct wallet-to-wallet fashion with the merchant or through an exchange to fiat currency. 

“Digital currencies are clearly a natural progression of cashless payments,” says Robert Hoffman, chief executive of Nets Merchant Services. “We recognise that crypto is at an early stage. For us, it’s very much about testing and allowing merchants to prepare digitally enabled and blockchain-enabled payment methods, and we believe these will be the future of payments and processes over time.

“It’s part of our ambition to empower merchants to benefit from the digitisation of payments. I think we, as a leading merchant service provider, are following a trend where we see consumers are showing a willingness to go digital in terms of payments,” Mr Hoffman adds.

The crypto companies are adding payment products, and the fintech and banking groups are adding crypto products

Cuy Sheffield, Visa

Though, for the time being, cryptocurrency acceptance as a means of payment remains limited to a few jurisdictions and is mostly geared towards higher end acquisitions. The extent to which they are now entering the mainstream is startling; today, for instance, it is possible to buy a Tesla in California, the UK’s most expensive flat at One Hyde Park or a slice of sachertorte in Vienna, all using bitcoin. 

“Now that we’re coming out of [the pandemic], I think it’s a boom time. I would say that for cryptocurrencies, as well as the ability to use blockchain, it’s the perfect moment because when we talk to companies, they are looking at different ways to change their current business paradigm,” says Young Pham, chief strategy officer at CI&T, a digital transformation company.

Although cryptocurrency prices remain volatile and regulatory risks remain high, the future of finance is now clearly moving in one direction. How this convergence story will play out, in terms of the winners and losers in this new financial marketplace, as well as the implications for monetary policy, remains to be seen. But as the global economy enters the uncharted, digitised waters of a multi-polar world, the cryptoeconomy will play an outsized role in its future. 

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