Beyond the Hype: Why Crypto Finance is here to stay
Exactly one year ago, the crypto market hype experienced a strong correction, which resulted in a volatile up and down throughout 2018. Spearheaded by Bitcoin, the altcoins also reversed their momentum and came to a crashing halt. During its mainstream moment in 2017, where the market capitalization had jumped from 18 billion USD in January to 597 billion USD in December, the crypto finance community had already been the topic of much controversy. After the crash in January 2018 but also during the current “crypto winter”, many critics are quick to herald the end of crypto –in their opinion a short-lived hype had come to its natural conclusion. I disagree –the initial shockwaves of the crypto crash have since faded away and in view of the current market stabilization and better regulation, cryptocurrencies, security tokens and asset-backed tokens are more relevant today than ever. I am convinced that crypto finance is here to stay!
The many facets of crypto finance
There are two main reasons why I believe that crypto finance will continue to disrupt financial services: Firstly, until the crash, the term ‘Bitcoin’ was used almost synonymously with ‘cryptocurrency’ and with a market share of 80% to 90% unambiguously dominated this new asset class. After a short drop down to 33%, it has now stabilized at 51% and it certainly still drives the market. Additionally, a variety of different ecosystems such as Ethereum as a DAPP and ICO platform or XRP/Ripple as a much popular money transfer/settlement solution, have established themselves beside the ‘crypto gold’ and exhibit market capitalization worth billions –even after the market correction last January.
With the arrival of more variety, asset-backed tokens, security tokens, etc., the ‘Bitcoin monopoly’ has given way to a broader more colorful eco-system. Secondly, regarding the rising number of business opportunities, startups and incumbents going into crypto finance have become more professional and more committed. Today the crypto scene consists of an increasing number of startups, investors and finance companies instead of a few tech-savvy early movers that helped shape the crypto-era before the 2017 hype. This trend helped fuel a newly emerging subindustry within financial services.
Emergence of a new market structure
Taking a closer look at the current market infrastructures, yet a striking imbalance in maturity compared to traditional finance stands out. The basis of the crypto finance infrastructure, mining, crypto exchanges and increasingly custody solutions are already well developed and are being even more professionalized, attracting not only new startups, but an increasing number of incumbents. A growing regulatory transparency also means that Risk, Legal & Compliance solutions for crypto finance are evolving steadily. API & Interfaces and Market Makers & Liquidity Providers, on the other hand, are still widely regarded as the ‘white spots’ of the crypto finance market and are yet to be introduced in the market. Large, single transactions still impact market prices too much, as has been demonstrated over the past one to two months.
Opportunities for the banking industry
I believe that traditional banks have no reason to be this hesitant towards getting involved in crypto finance. They have a great ”right to win”, as they possess years’ worth of expertise in advising customers and providing the necessary processes and safety nets to contribute to the world of crypto and secure their roles within the market. Additionally, the increasingly enhanced market regulation better complies with their high standards and gives them the opportunity to provide a comprehensive crypto offering. However, the banking sector should move quickly: As soon as exchanges start offering crypto and security token trading, more customers will want to buy and trade immediately, giving all first movers a vital head start. If incumbents want to take their share in this new crypto finance market, they need to start implementing the necessary structures and build strategic capabilities now.
The crypto exchanges in this new market infrastructure are still clearly dominated by Asian companies (e.g. Binance, OKEx, Bitfinex, Huobi), while US-based exchanges (e.g. Coinbase, Kraken) are currently trying to increase trading volumes on their side of the ocean. More and more US (e.g. ICE’s Bakkt) and European exchanges (e.g. Swiss exchange SIX with SDX and the Stuttgart exchange with Bison) are already in the starting blocks. Interestingly, most traditional banking services and incumbents are still missing from the scene and are reluctant at taking their first steps in areas like wealth & asset management, retail banking or investment banking solutions around crypto assets. Only gradually, an increasing number of banks investigates potential entry points and considers offering, for example, crypto storage facilities, trading platforms or crypto investment opportunities.
by Daniel Diemers, Partner at PwC Strategy&
