1. Introduction

The importance of analyzing cryptocurrency’s impact on the global financial landscape has never been more prevalent. Varied legislative boundaries at a national level and the absence of international law leave an uncertain market to invest in. In spite of this, both institutional and retail investors are pouring funding into the market. The increasing public interest can be noted by the current market capitalization of this industry and the search engine traffic from the public – the data for the number of searches for the word ‘cryptocurrency’ reached its current peak value during the week ending September 30, 2017. In the presence of a market that captures the interest of the public and investors in such a substantial manner, it is important to highlight the impact of the market on the world’s financial landscape in order to better understand how it may shape the global economic environment in the years to come.

Cryptocurrency is a relatively new form of currency that exists only in the digital world. In the short span of nine years, it has evolved into a diverse trading market with a market capitalization of $170 billion. The development of this market is one of the most rapid and disruptive occurrences of the modern era. The impact of cryptocurrency on the global financial landscape cannot be understated. Its existence has challenged the accepted notion of what constitutes currency and pushed the boundaries on what can be considered an asset.

1.1. Definition of Cryptocurrency

“A cryptocurrency is a digital or virtual currency that uses cryptography for security and is generally decentralized. Most cryptocurrencies are blockchains that are usually created as an incentive for anyone validating transactions using those digital currencies. Cryptocurrencies are primarily used outside the banking systems and are exchanged over the Internet. The first cryptocurrency was Bitcoin, which was created in 2009 and is still the most well-known and used. Bitcoin has been used as a template for the many other cryptocurrencies created since then and hence most cryptocurrencies are direct descendants of Bitcoin with only minor unique changes to the code in order to meet user needs. The term ‘altcoin’ is widely used to refer to any cryptocurrency that is not Bitcoin. Step by step guides on how to validate cryptocurrency transactions can be found at validatebitcoincrashplans.com. An example of a transaction validation guide is the service known as Staking, which is used in the validation of Peercoin transactions. This requires users to hold the physical Peercoins and run the client in order to ‘stake’ and validate the transactions. In return for validating these transactions, the service offers an incentive in the form of more Peercoins.”

1.2. Importance of the Crypto World

The crypto world has had an enormous impact in its short existence. Much of that impact has come from changes in how we view and use money. It has addressed the fundamental change in our world today with the shift from industrial to an information society. It is keeping with the times in seeking to create and implement new technologies. The implementation of technology in today’s fast-paced environment is critical for success and staving off obsolescence. It is money for the internet. More than any other form of money before it, crypto is easily transferable between citizens. Its transfer can occur on a global scale and there is no differentiation between national borders. This makes it an excellent choice for different forms of currency, if you consider the foreign exchange trading in the Forex market is over 7.7 trillion dollars in 2019 and cryptocurrency is a better version of that. Cryptocurrency is the root of the tree of trust. If you talk to people today about their feelings on the economy, many are jaded and feel that there is little chance for them to get ahead. They live paycheck to paycheck and are saddled with debts such as student loans, mortgages, and prolonged credit card debts. There is little expectation that the economy will improve for them. This is a global problem. The real question is how economic conditions have affected the average person. This is important because members of society have become disillusioned due to severely declining living standards for the median household. Many are looking for a way to change the system, akin to the way the people of England changed the societal system in the 16th century by first translating the Bible to English, allowing reform-minded individuals to later challenge the clergy against the word of God. As history has shown, radical change in the system is possible, it is just a matter of finding the right formula and reasons for doing so. This problem and potential solution bring us to the importance of cryptocurrency.

2. Recent News and Updates

The Director of the US Financial Crimes Enforcement Network, or FinCEN, has announced plans to prepare new regulations for cryptocurrencies. These are done in hopes of preventing their use in illicit markets. While the details aren’t specific, it is likely this will mean compliance and identity verification for cryptocurrency users. This could mark the end of the wild west days of crypto.

A new bill being proposed in the United States Senate might require anyone sending over $10,000 in crypto to report it to the Internal Revenue Service. This is in hopes of cracking down on tax evasion. This bill serves as a threat to the anonymity that some users of cryptocurrencies desire.

India has recently announced plans to ban cryptocurrencies, with a potential jail sentence for transacting using them. While these are just plans, it was enough to send the market tumbling. This shows how reliant the currency is on the stance of national governments, and how anything but a clean legal status can hinder its success.

2.2. Regulatory Challenges

In recent days, bitcoins have followed a slightly downward path. However, the news concerning its acceptance into both PayPal and Elon Musk’s Tesla have caused a stir in the financial market. Some news boards have said that these events have legitimized the cryptocurrency, limited the amount of bitcoins that could be mined to 21 million.

2.1. Rise of Bitcoin

Recently, a number of events in the crypto world have had far-reaching effects. These events are key to understanding the current state of the cryptocurrency and its implications in today’s world.

2.1. Rise of Bitcoin

In 2009, something by the name of Bitcoin surfaced. A mysterious person, by the name of Satoshi Nakamoto, introduced the concept of Bitcoin. It was to be designed as an open source software and till today, it still remains open source. The one difference between now and the last is that it is now a bona fide success. So what is Bitcoin? To put it simply, it’s digital currency. It was created to bypass the necessity of physical money and risk of it being lost or stolen, mainly because Bitcoin was untraceable and private. Another fact was the possibility of global “micro payments”; small online transactions that might be too expensive to cover costs with credit cards. In their minds Bitcoin was the solution. What attracted people was that no middlemen were needed and transactions were irreversible with extremely low fees.

2.2. Regulatory Challenges

Recently, various central banks and government organizations have been in heated discussions regarding the legality of cryptocurrency. Whether it’s Bitcoin or any other form of digital money, politicians worldwide are putting in plans to regulate the market and protect national economies. In January 2016, the New York State Department announced plans to issue a BitLicense. The recent development of this new policy opens the door for New York to become the first US state to supervise and regulate digital currency businesses and money transmitters. A clear set of regulatory guidelines and laws may bring certainty and protection to consumers, investors, and businesses. It will also reduce the amount of money laundering, terrorist financing, and other illegal activities often associated with ‘crypto’. It’s not just Bitcoin that has attracted attention. A recent discovery of a proposed European Union directive has shown plans to regulate Digital Currency exchanges and wallet providers. Under the proposed directive, cryptocurrency platforms will be subject to the same oversight as traditional financial institutions. Often seen as beneficial to protecting consumers, there are some who believe regulations can eventually cause more harm than good. A study by the British government in 2016 stated, “There is currently a relatively low level of criminality associated with cryptocurrencies. The technology has not in itself brought about new methods of committing crime, but it has heightened the speed and efficiency of existing criminal activity.” Although this is the case, the same report concluded that regulation would be beneficial for the long term.

2.3. Emergence of Decentralized Finance (DeFi)

In practice, it has been a chaotic process, marked by innovation and imitated so fast it is hard to keep track. Admin keys will never again be secret. Maker has seen a new generation of algorithmic stablecoins rise then get targeted by competitors. Yearn sparked a rash of mergers, not always to the benefit of its users. Sushi brought forward the vampire attack. And Nomi gave the world a DeFi hero’s journey. High drama aside, the net result has been that the genie cannot be put back in the bottle, and new standards are being set for what a financial system can be.

As a community, decentralized finance is nothing new, with a variety of platforms offering P2P or non-custodial services in Bitcoin since as early as 2012. But, for all involved, the events of 2020 and early 2021 are like the dawn of a new era. The vision is of services that have no downtime and no possibility of censorship, where users retain full control of their funds at all times. The recent GameStop debacle has given the world a powerful use-case for this. The response of many in the crypto industry was: “this is why we need DeFi.”

2.4. NFT Boom

The NFT (Non-Fungible Token) space has been around since 2012, enabling creators to issue unique cryptographic tokens that are not interchangeable with other tokens or assets. NFTs have been closely associated with Ethereum and its token standard called ERC-721, although with the recent shift towards the new ERC-1155 standard, NFTs are becoming increasingly easier and cheaper to produce. The latter standard allows for a batch of fungible or non-fungible tokens to be minted at one time with lower cost, as well as the ability to attach more metadata to a single token compared to past standards. This will likely lead to an increase in tokenized artworks and digital collectibles that are often of high value and require token uniqueness to reflect their authenticity and rarity. With many of these creations coming from high-profile artists and sometimes being cross-promoted by mainstream celebrities, this has caught the attention of the masses and led to growing demand for blockchain-based digital items. As a result of increasing crypto knowledge and appetite for diversification of assets, NFTs have begun to infiltrate traditional finance and physical product ownership through token-based representation. This year, however, the presence of NFTs and token sales grew tremendously with the launch of countless blockchain games built on various platforms including Ethereum, WAX and TRON. This generated a great volume of NFTs being used and sold directly on these gaming platforms, with the advantage of true ownership and the ability to trade NFTs in secondary markets providing undeniably enticing incentives for gamers. It’s also worth noting that certain new NFT marketplaces and communities are popping up with the aim to provide users with a social platform for showcasing and discussing their tokenized digital items. As the NFT space continues to evolve and diversify into different markets and industries, it has gained the interest of crypto newcomers and traditionalists looking to get involved with this increasingly viable blockchain use-case.

3. Implications and Opportunities

Key to this discussion of implications and opportunities is the imagination of a world in which blockchain technology has permeated society and interacted with incumbent systems. In this world, developing countries are the most direct beneficiaries of blockchain-backed cryptocurrencies. Currently, over 2.5 billion people lack access to banking or reliable financial services. This is a direct result of the high costs associated with having a traditional bank account. Even in developed countries, where a bank account is something of a given, the fees, service charges, and interest rates levied onto small bank accounts are often too high for those with low income to afford. This effectively creates economic segregation, where the poor are denied access to credit or saving services. In contrast, blockchain technology makes it feasible to have a bank account of some form via a cryptocurrency on a mobile phone, without needing to access a financial institution. Increased access to financial services could increase savings, economic development, and investment in countries with underdeveloped banking systems. For this to occur, further development of inexpensive mobile phones and readily accessible internet services would be a prerequisite. Steps would also have to be taken to educate people on how to manage digital currency in a way that’s secure and useful. But the possibility of such a paradigm shift is truly revolutionary. An increased flow of “money” into economies with high inflation (a somewhat ironic result of the fact that many are driven to cryptocurrency as a speculative investment) would be a source of stabilization and growth. Countries with predatory governments that use control of the financial system as a tool of oppression could see this trend reversed. In the eyes of this author, shifting the balance of financial power back to the people is a long-term cause worth significant sacrifice.

3.1. Financial Inclusion and Accessibility

Additionally, for easy and worldwide access to financial products and services, including the previously mentioned citizens of developing nations, we have an issue regarding the interface and the onboarding process. A common complaint from beginner crypto users is the overwhelming nature of wallet and asset management. DeFi is even more complex and often requires the use of external resources to locate the desired service. While a tech-savvy cosmopolitan may have no problem with this, it is far too much effort for the expected reward for much of the global population.

The volatility of crypto assets, combined with irregular interest rates offered in emerging DeFi projects at this moment in time, will likely discourage those in the above situations from involving themselves in said financial services until equivalence has been demonstrated.

Unfortunately, it isn’t all good news. For those savvy with how the traditional banking system works, there are numerous ways in which they can exploit it to find themselves a profitable deal on the dispersion of their assets. High-interest savings accounts, time-locking loans, credit card rewards, and using an overdraft are just a few examples.

If we consider the real use case and the potential to improve the lives of ordinary citizens in developing countries, it becomes even more powerful. Imagine being able to get a loan without the need to prove your creditworthiness, but instead using assets as collateral and adhering to terms set in a smart contract. Or imagine receiving micropayments daily for the work that you do, no matter where in the world you may be.

With decentralized finance (DeFi) making the headlines in crypto stories of recent months and years, financial inclusion and ease of access have been crucial topics. Undoubtedly, the crypto world aims to show an improvement on standard financial systems. The capability to be your own bank, to take control of your own assets rather than delegate them to a trusted third party, and the ability to access various financial products and services without discrimination all year round are powerful selling points for potential crypto investors. They are also a significant factor in the increasing popularity of crypto asset affiliates and marketers.

3.2. Potential Risks and Security Concerns

Due to the unregulated and volatile nature of the crypto market, it has been a breeding ground for high-return investment and the potential for high-risk outcomes. With the creation of over 2000 crypto-tokens, volatile price swings and promises of guaranteed investment returns, many retail investors face the real opportunity of potential loss and sometimes loss of their entire investment. In an attempt to bring safety and more traditional investment opportunities into the sector, institutional and retail commodity trading on digital assets using blockchain is now being developed. Safe trading on these platforms could allow more investment to flow into bitcoin and other cryptos in an attempt to capture capital gains and reduce holding volatility. Competitive Cboe and CME bitcoin futures markets are planned to be launched later this year offering the safe trading of bitcoin and a more regulated and respected market for the digital currency. Cyberattacks are another real risk in the crypto space. Japan’s Financial Services Agency is currently looking into mandating security requirements to protect customer assets after major exchange Coincheck was hacked for over 500 million USD in NEM, affecting 260,000 customers. As the forefront of technology shifts to blockchains and cryptocurrencies, hackers are becoming more savvy and frequent in their attempts to steal funds with attacks focused not only on exchanges, but on ICOs and individual investor wallets. Due to security concerns, the crypto market is becoming a booming market for cyber insurance as firms move to offset potential risk.

3.3. Investment and Trading Opportunities

Cryptocurrencies open up new investment and trade opportunities that are not confined by traditional approaches. Marching similar to making a traditional investment in assets such as bonds, stocks, equity or cryptocurrencies can be traded on the open market. This can involve focusing on the short-term price movements (to maximize returns in the form of real-world currency) or to use the currency as a way of diversifying a portfolio in preparation for retirement. The possibility of high yields has drawn a lot of attraction from both new and experienced investors, and with the relative youth of the crypto market, it is a target-rich environment for many. 2017 saw a number of hedge funds specifically targeting cryptocurrency and ICO investments, thus offering new job opportunities with in-depth research and understanding for investors. Due to the borderless nature of cryptocurrencies, foreign investment into Initial Coin Offerings is possible, providing an opportunity for an FX play in addition to the investment into the token. With little barrier to entry for an ICO, regulatory issues aside, the ICO markets provide a similar opportunity to the penny stocks markets with varying success. Lastly, and perhaps the most common investment today, is to buy and hold a certain cryptocurrency in the hope that it will increase in price over time. The popularity of Bitcoin has attracted many people to this sort of investment, and the relative stability of the stock can make it an attractive alternative to holding gold.

4. Future Outlook

The crypto world is continually evolving and the future offers endless possibilities. Throughout its short but eventful history, cryptocurrency’s unique underlying technology, ‘blockchain’, has offered solutions to a lot of real-world problems that previously seemed intractable. Cryptocurrency’s ability to provide cheap and efficient peer-to-peer transactions has provided companies with the impetus to develop their own cryptocurrencies to enable truly global competition, free from the costs of exchange rates and international transaction charges. An example of this is the ongoing work to integrate bitcoin into the video game ‘space’, allowing players to keep one universal currency which can be transferred in and out of the game without cost. And in the developing world, cryptocurrencies offer a glimmer of hope for people whose national currency is rendered worthless due to hyperinflation or corruption. For these people, cryptocurrencies can offer a relatively stable store of value, or even a medium of exchange. The recent astonishing rise in value of bitcoin has been attributed to capital flight from and speculators within China, who see bitcoin as a superior store of value to the yuan. The future of cryptocurrencies will likely be determined by its younger generation who have grown up with the internet and smartphones. For these people, making, receiving, and storing cryptocurrency may become second nature and can lead to rapid uptake in the event of an economic crisis or significant inflation. These ‘digital natives’ will also be pivotal in the integration of cryptocurrencies with online technology and businesses. It is not implausible to say that the internet is moving towards complete decentralization with services like peer-to-peer energy trading already being trialed. These developments could lead to a new ‘crypto economy’ which is intrinsically linked to the existing one. This may truly be cryptocurrency’s time to shine, providing the software and infrastructure for these decentralized systems to function securely and efficiently.

4.1. Technological Innovations

Another significant security solution is the use of multi-sig addresses with 83% of companies now using them. A multi-sig address is one that requires multiple keys to authorize a transaction. The implementation of multi-sig addresses and the preference for cold storage indicates an increased effort to protect cryptocurrencies, this is somewhat of a reaction from past experience, where cryptocurrencies were often lost or stolen due to negligence or lack of understanding regarding security solutions. Adaptive multi-sig is a still bigger leap in terms of security, it is a smart contract level solution by which an organization can control the flow of cryptocurrencies via a set of rules, predetermined among the involved parties. This technology is still in its early stages but has potential to significantly impact the security of cryptocurrency.

One of the most significant innovations is in the security of cryptocurrency storage and wallet solutions. Our last report highlighted that 56% of organizations used hot storage to store their cryptocurrency, this has now dropped to 32%. Hot storage is often cited as the weak link in cryptocurrency security, it is the method by which organizations connect to the internet in order to access their cryptocurrency, it is also the most susceptible method to hacking. The preference now is for cold storage; the implementation of keys on a device not connected to the internet, this is now the most widely used storage solution and the move represents an increased level of security across the industry.

Technological innovations is one such area which has seen huge strides in the past few years. The cryptocurrency community is an innovative one and it is no surprise to see the technology making leaps and bounds. At the time of the last survey there were a few technologies which had not yet been implemented but were in the pipeline, these have now come to fruition.

4.2. Integration with Traditional Financial Systems

Integration with the legacy system also presents a huge opportunity in terms of cost saving on foreign remittance. Today, moving money in between banks often requires a payment to a series of third-party services, most notably SWIFT, ACH, or systems like Western Union. Typically these payments are highly unpredictable and are dependent on the amount being transferred and the countries, but usually they are between $20-50. Digital currency provides the opportunity to send money across borders with the same service level, for a fraction of the price. This cost factor is very appealing for global businesses who spend huge amounts on foreign exchange costs to move money between subsidiaries. Thus, it is likely that the first businesses to adopt digital currency into the treasury operations will be multinational corporations.

Many people believe that the integration of digital currency with the traditional financial system is the most significant step towards legitimacy of the digital currency revolution. This move will bring the advanced functionality of digital currencies to the global market. It is predicted that governments will begin to hedge national currencies on public blockchains, or in private ledgers, that can be accessed by approved banks. This would be a complete change from the way currency is held today, requiring customers to trust their banks to safekeep their money, with little guarantee that they can access it at any time.

4.3. Governmental Regulations and Policy Changes

The relationship between digital currencies and the governments of the world is a rocky one. In January of 2014, the New York Department of Financial Services launched its inquiry to examine the appropriate regulatory guidelines for digital currencies in an attempt to provide clarity and protection to consumers, investors, and businesses. Although the impact of this is still ongoing and has led to a mass exodus of Bitcoin companies from the state of New York to avoid the strict regulations posed by the BitLicense, most notably ShapeShift, who incurred the wrath of the SEC in doing so. The recent decision by the SEC to declare the DAO tokens securities serves as an indication that government intervention could be seen as a hindrance to the ethos of decentralization held by the cryptocurrency community.