The public fascination with cryptocurrencies as a virtual pot of gold has overshadowed the rapid rise of the technology as an alternative payment mechanism alongside stable, government-backed currencies like dollars, shekels, and yuan.
Last year, Bitcoin delivered a 303% gain. It has gained another 35% so far this year, after peaking as much as 124% higher in mid-April.
To date, twelve years after the first bitcoin was traded, this volatility --let’s call it violent mood swings-- in cryptocurrencies has limited its role as a mass-market payment alternative to so-called fiat, or government-backed currencies, which regulators, governments, established financial institutions and professional investors are coming to recognize as its enduring value.
As always, settling into teenage life will take some adjustment.
In Israel, cryptocurrency shows signs of turbulence, as well as maturity. On the turbulent side, there have been several high-profile lawsuits involving alleged fraud and lax security at crypto-focused funds and startups.
But despite the turbulence, signs of maturity abound: the Bank of Israel is reportedly examining the benefits of the crypto market with a new digital shekel pilot, and experimenting with Ethereum - one of the largest blockchain networks in the world.
Beneath the wild ups and downs, the speculative binges, and challenges to the establishment’s authority, however, there is rising appetite by fintech players for maturing cryptocurrency features and functions that can transform the way ordinary people send, receive and store money once the market rollercoaster ride subsides and crypto grows up a bit more and starts to bring the fintech and crypto worlds closer together.
The "older" players, fintech challengers like PayPal (22 years old) and Klarna (16) are taking the lead in making crypto mainstream.
Recently, PayPal (22 years old) agreed to acquire Curv (three years old), an enabler of security digital currency transactions, and PayPal has also opened up its network of 350 million accounts to help consumers store cryptocurrencies in their accounts to pay merchants. It’s falling to the challengers to take most, if not all, of the risks, discovering new business models, failing fast, pushing regulatory boundaries, and giving them a lead on capturing the crypto payments business as it goes mainstream.
But that is changing.
Consultant PwC predicts consolidation will be driven by larger financial services players seeking to roll out ancillary services to boost their own crypto offering, like compliance to guard against shady business. So some institutional investors are increasingly treating cryptocurrencies as an asset class --a sign of maturity-- with many now considering it a suitable side-bet, if not an essential part of any balanced investment portfolio. As an asset class, the market capitalization of cryptocurrencies shot above $2 trillion earlier this year before settling back to current levels around $1.77 trillion, according to CoinMarketCap.
Maturing, yes, but still very much displaying its teenage tendencies, and especially those testing the boundaries of the established order with things like cybercrime and money laundering.
Still, older financial institutions recognize the need to feel young again, or risk becoming like the dinosaurs, so institutional players, large investors and cash-rich crypto platforms will drive consolidation.
And they’re driving like it’s the Fast and the Furious (the ultimate modern-day teenage action franchise): in the first five months of 2021 we have seen $1.93 billion in crypto M&A compared with $1.65 billion in 2020, according to researcher Token Data. This year, crypto deal-making is on track to surpass 2018's banner year of $2.84 billion, the biggest year ever.
2021 is "already on track to significantly surpass it from every single metric," crypto leader for management consulting firm PwC Henri Arslanian stated in a recent report.
The direction of travel is clear: crypto is growing up. The question now is whether it will grow into a mature and responsible member of financial society and shed its mood swings and rebellious characteristics, or lock itself into its room, turn the lights off, the heavy music up, and to hell with the grownups.
The writer heads law firm Herzog Fox & Neeman's Tech Division.
Published by Globes, Israel business news - en.globes.co.il - on June 30, 2021
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