What Is Driving Institutional Adoption of Cryptocurrencies? — Aus Merchant

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Aus Merchant

6 min readApr 15, 2021

In the first week of 2021, cryptocurrencies’ market value surpassed $1 trillion. Institutions worldwide are starting to adopt cryptocurrencies as a standard payment method. In addition to direct payment options, there are lending and trading options that attract financial institutions as an additional revenue stream.

What is driving this change? Why are people starting to make the change?

Many experts speculate that the pandemic has boosted crypto usage and valuation. Theories include:

An increasing move to digitizing our lives.
A desire to hedge against inflation as more of the central banks are pumping out money.
A feeling that people need to safe-harbor their assets when times are uncertain.
A wave of new speculative interest from investors in various institutions.

We’re going to examine some of the drivers of this institutional adoption of cryptocurrencies to help you understand the shift that’s happening in the global market.

7 Drivers for Cryptocurrency Adoption

1. Bitcoin as a Global Macroeconomic View

During the past several years, the global macroeconomic stage conditions have shifted to allow Bitcoin and other cryptocurrencies to achieve sizable gains in the mid and long-term. Cryptocurrencies do not require fiat currencies to fail, but fiat’s weaknesses are likely to expedite the demand and adoption of cryptocurrencies.

In the US, history suggests a connection between the devaluation of native currencies like the USD and negligent borrowing at a federal level. The elimination of the gold standard and shift to a fiat system set the stage for unrestricted borrowing without consequences.

During the pandemic in 2020, temporary stay-at-home orders and business closures drove central banks to digitally print money at an exponential rate and adding trillions of dollars to their balance sheets. Central banks began monetizing foreign debt and drove real yields into the negative, making the money printer go brrr.

With the shift to buying BTC becoming socially acceptable, top money managers are jumping on the bandwagon. When purchasing BTC is normalized, the career risk is minimized and opens the floodgates for exponential growth all the way into 2023.

2. Ethereum 2.0 Drives DeFi Innovation

Ethereum remains a top choice for institutional investors in crypto. Currently, the Grayscale Ethereum Trust (ETHE) holds $1.7 billion of assets under management. Ethereum provides an open-source protocol to create apps and programs to streamline the exchange of cryptocurrency. This open-source currency allows for inter-exchange settlements, yielding investors higher returns than the legacy markets. The open-source model of stablecoins provides stability, availability, and resistance to censorship for cryptocurrency creators and investors.

DeFi stands for Decentralised Finance, DeFi creates an alternative to centralized systems that slow down the speed and sophistication of transactions. The rise in DeFi has resulted in ETH being one of the most transacted cryptos. The newest version of ETH is Ethereum 2.0. It is designed to drastically transform the largest smart-contract in the world. This is the first time a blockchain of this size and value will attempt to move all users and assets to a decentralized network.

Additionally, the CME (Chicago Mercantile Exchange) announced that they are launching Ether (ETH) futures in February 2021. The CME was the first to launch Bitcoin futures in 2017, so this is a big announcement. Similar to Bitcoin Futures, the Ether futures will be cash-settled based on the CME CF Ether-Dollar Reference Rate.

3. Stablecoins

Stablecoins are a type of cryptocurrency meant to match a specific country’s currency and avoid the volatility of other forms of cryptocurrency. For example, the US Dollar — the USDC is meant to match its value to the value of the US Dollar.

When the fiat currency is deposited into an account or credit-line and converted to stablecoin, it is then untethered and can freely move around the crypto-verse. The USDC is supported by Ethereum, Solana, and Alogorand public chains. As stablecoins seek to match and standardize currency, the inter-exchange settlements in the market allow investors to yield higher returns.

Australian project Synthetix Network (SNX) uses a synthetic stablecoin, sAUD and sUSD for its derivatives trading platform and decentralized finance network.

4. Blue-Chip Defi Tokens

In cryptocurrency, a token becomes a “blue chip” when blockchain currencies reach a market capitalization of $2 billion. When talking crypto blue chips, there’s a contrast between the ordinary and DeFi coins. Both use the blockchain concept, but DeFi coins have more than just stores of value, and are on the rise, potentially overshadowing the normal coins created.

Money Legos are becoming the way to create a new financial structure in the DeFi world. Trading, spending, and lending money using multiple apps to streamline the process, providing a bankless future.

There are many types of DeFi tokens using money legos. Some of the top tokens are:

5. Crypto Credit & Leverage

With CME futures announced in 2017, Genesis Capital launched a lending desk in 2018. Prior to this, crypto credit markets didn’t even exist. Additional crypto lending and futures driven by FTX and Binance further strengthened the crypto credit market. Now that prop trading firms and crypto hedge funds have more toys to play with, they provide more stability and tighter spreads between CeFi and DeFi markets.

2020 was the year for perpetual, basis trades, collateralized OTC lending, flash borrowing, and yield tokenization. The crypto credit explosion means that many would-be sellers may opt to borrow against collateralized holdings than taxable sales in the next year. DeFi and CeFi credit market infrastructure has become ten times more robust since 2020, and Genesis Capital’s is a bellwether for the crypto credit market.

6. Regulation

Regulations and legislation is often an overarching guideline to regulating financial and social actions. The current efforts of legislation are directed at unrestrained growth of stablecoins. While intended to protect investors from market volatility, on the other side of the industry are entrepreneurs who feel that there is often too much regulation. However, with more regulatory clarity for taxation, securities definitions and use, the industry experiences less volatility and creates a better investment for buyers.

The US Office of the Comptroller of the Currency (OCC) published a letter in January 2021 allowing national banks and financial institutions to participate in independent node verification networks and use stablecoin to conduct payment activities and other bank functions. With this development, US Banks can use public blockchains and dollar stablecoins as a US financial system’s settlement infrastructure.

With this guidance, banks can treat public chains as infrastructure similar to ACH, SWIFT, and FedWire — in addition to stablecoins like USDC with electronic stored value. The significance of this is that decentralized, permissionless, open-source, and internet-mediated software is becoming the foundation for the US Financial System and the global economy.

7. STABLE Act

In response to financial institutions providing cryptocurrency services for payments and other financial transactions, the US Congress introduced the Stablecoin Classification and Regulation (STABLE) Act in 2020. This Act outlines the following:

It requires that any prospective issuer of stablecoin obtain a banking charter,
Any company offering stablecoin services is to follow appropriate banking regulations following existing regulatory jurisdictions,
When a company or bank issues a stablecoin, they must notify and obtain approval from the Fed, FDIC, and other banking agency six months before issuance and perform ongoing analysis of systemic impacts and risks,
And any stablecoin issuers obtain FDIC insurance or maintain reserves at the Federal Reserve, ensuring that stablecoins can be readily converted to USD.
The STABLE Act’s main objective is to protect low to middle-income customers from the cryptocurrency market’s volatility.

An Australian Perspective

The Australian cryptocurrency industry leads the way for many projects in decentralized finance projects with ambitions to support institutional-grade financial products such as derivatives and managed funds. Projects including Synthetix and dHedge aspire for just that.

With the building blocks of a decentralized financial system in place, Australian projects are set to be a big driver in the institutional adoption of digital assets globally.

The environment for cryptocurrency and blockchain projects is mostly favourable. Organizations such as Blockchain Australia lead industry engagements and help provide clarity for business as to regulation and best practice.

Larger global exchanges such as Binance and Kraken establishing teams in Australia in 2020.
Regulatory clarity from AUSTRAC as to the AML/CTF obligations for digital currency exchange providers.
The Reserve Bank of Australia is trialling stablecoins for wholesale settlement.

Aus Merchant is a gateway for businesses and private investors to utilize cryptocurrency for investment and business goals. Whether that goal is to buy, sell, trade, hold, earn, spend or receive digital assets — Aus Merchant is able to assist.

Originally published at https://ausmerchant.io.