5 Blockchain Industry Predictions for 2020
After recently conducting a retrospective on my 2019 predictions, scoring 3/5 by my own self-assessment, I’m ready to issue some more for 2020.
NB Special thanks to Silicon Luxembourg who published these last week (minus some extra material here)
This year's summary:
- DeFi will grow, fast
- China will be first to the CBDC punch
- Libra won’t launch
- Regulator strain will intensify
- Bitcoin safe haven status will be tested
DeFi will grow, fast
DeFi refers to ‘Decentralised Finance’, which generally refers to an emerging financial system built mostly on Ethereum. As the name implies, it is a broad technological movement that includes digital assets, financial smart contracts, protocols and decentralized applications (DApps). Put more simply, it is “financial software on the blockchain that can be pieced together like Money Legos.” (Source: Defipulse.com)
DeFi is a natural evolution of the Blockchain ecosystem that is doing to finance what cryptocurrencies did to money. With a diverse array of applications already running, it’s typical to measure the scale of the DeFi industry in terms of the amount of value that has been ‘locked’ in DeFi-related smart contracts, which has grown rapidly from less than $2m in November 2017 to more than $695m in December this 2019.
I believe this trend is only just getting started. In the same way that email was only the first building block of the internet, cryptocurrency is only the first building block of blockchain technology. And, while many people might have been focusing on coin prices too much to consider what would come next, for me this was always what blockchain is all about! Completely new, decentralised financial constructs, including lending, derivatives, payments, asset management, and other services.
This is DeFi, and it’s going to get much bigger, much faster in 2020. The risks are that it is perceived as the next ‘ICO bubble’, with the invitation of ‘invest in me’ simply being replaced by ‘lock with me’. Some suggest that the high lending yields currently on offer (5–7%+ on stablecoins) are surely signs of subsidy and not simply a result of ‘disintermediation premium’ that many assume.
China will be first to the CBDC punch
The People’s Bank of China will make history by being the first national central bank to issue a so-called CBDC (Central Bank Digital Currency) in 2020. While being initially limited in scope (substituting just cash-like M0 money, and not M1 or M2 money which includes bank deposits) and limited in reach (focusing to domestic, not international payments) this will nevertheless be a major milestone in monetary history and a turning point for the global financial system.
Meanwhile, many more countries around the world will announce formally that they are developing a CBDC, adding to the list that currently includes the US, Russia, Canada, Singapore, Turkey, Sweden, Uruguay, South Africa, Thailand, the Bahamas, and others.
Once governments are in a position to launch their own retail CBDCs, the private sector is very likely to be invited into the fold, to fill the capabilities that central banks do not possess and have no desire to cultivate. Large private corporates will be able to provide important intermediate services, including onboarding, distribution, security provisioning, and customer-facing functions. The emergence of such public-private undertakings in the sovereign currency sphere will also be a landmark shift.
The particular design of each CBDC (for instance, whether or not it bears interest) will have profound implications on its effectiveness as a monetary policy instrument. This, plus the difficult questions of interoperability, cross-border use, and regulatory demands will become hot topics of discussion.
Libra won’t launch
A coin announced by Facebook in June 2019, Libra’s stated aim is to ‘enable a simple global currency and financial infrastructure that empowers billions of people’. Almost immediately after it was announced, Facebook’s CEO Mark Zuckerberg and other project leaders were hauled in front of Congress to testify on the ambitions and implications of the project. Meanwhile, several European governments have stated that they are preparing to block Libra if it comes to fruition.
Why such animosity? Well, unlike the relatively lower adoption of traditional cryptocurrencies such as bitcoin, Libra has the potential to be instantly credited to the almost 2.5 billion Facebook users in over 190 countries. This catapulted the topic of global money to the top of government agendas around the world, prompting much-needed discussions over how to respond to the Libra initiative. Since Libra would be the first time in human history that a form of world money was created by the private sector, with the reach and know-how to distribute it across the planet, no wonder governments took notice!
I don’t think Libra will launch in 2020. This is because of the worries by governmental institutions who say that a) Libra presents risks to financial stability and b) it is currently untenable from a regulatory perspective. That’s not to say Libra won’t happen, but first, there are many questions that will need to be answered, such as:
- How can AML/KYC controls be implemented across so many jurisdictions?
- Won’t mass adoption of Libra in countries with inferior currencies decrease the effectiveness of those domestic central bank’s operations?
- During the initial buy-in of Libra, won’t the holders of volatile domestic currency holders encounter continued weakening of their domestic currencies against Libra?
- If users don’t have a direct claim on the Libra Foundation reserves, won’t they lose out if the reserve were to be liquidated?
- If the entire system loses stability, who would / could bail it out?
Until these questions (and more) are answered, I can’t see Libra seeing a full launch in the near future, at least not in its current form. And I think the facebook team expected this global debate to emerge, which is why they released the white paper with several technical aspects still unclear.
Regulator strain will intensify
Never before have I witnessed an industry develop so fast as I have with Blockchain technologies. It’s truly remarkable to see so many innovations surfacing in such a short space of time. But as the saying goes, ‘Regulators are never far behind’, especially for those technologies that involve financial or monetary innovations.
For regulators, it must be hard to keep up. It seems like, for every one clarification issued by a regulator regarding blockchain technology, 10 more questions arise in the meantime. Some guidelines already feel out of date by the time they are issued. Of course, you can’t regulate what doesn’t yet exist and the nature of regulators is that they have to be reactive, not proactive. But this ‘lead time’ gap will surely only get bigger as the advancements in this technology move orders of magnitude faster than the cycle time necessary to pass new laws and directives. We’ve never seen such disparity. Such accelerated timescales are akin to imagining that we were still today discussing how to regulate cheque fraud; things have come a long way since then already.
It’s going to be really interesting to see how regulators around the world handle this shift. There are a lot of smart tech-savvy people at regulators and so it’s possible that they will be pragmatic, agile and proportionate in drafting apt and sensible legislation without stifling innovation. However, as this space continues to rapidly expand, I believe it is possible that regulators will be forced to start blocking and suspending more initiatives, even if just to buy enough time to study them more and understand their implications (e.g Facebook’s Libra). Or, regulators may be forced to use blunt regulatory tools or sweeping directives that compensate for lack of agility by being overreaching in scope. Any heavy-handedness will inevitably lead to protest and/or pushback by industry innovators, and possibly bigger patterns of company migration to different jurisdictions with less burdensome regulation.
In any case, I see an increasing strain developing in 2020 between the regulators and the crypto/blockchain companies, even if regulators are trying to be innovation-friendly and the companies are trying to be compliant, due purely to the speed and growth of financial innovation.
Bitcoin safe haven status will be tested
Storm clouds are gathering above the world economy. If you subscribe to the views of people like Ray Dalio, then you may believe (as I do) that pressure is building towards a significant market event. Typically, when investors want to defend their portfolios against future volatility, they buy so-called ‘safe haven’ assets which benefit during times of economic turmoil, such as gold, US treasuries, or the Japanese Yen.
But what about bitcoin? Is bitcoin a safe-haven asset? This will be a question that will be increasingly discussed (if not tested) in 2020.
On the one hand, bitcoin is still an extremely volatile asset with 5-10% daily price swings still commonplace, and as such is naturally considered as a high-risk investment under normal considerations. As such we would expect it to be subject to the same ‘risk-on, risk-off’ investor sentiment as other high-risk assets such as equities or options/derivatives.
On the other hand, bitcoin has consistently shown that is in fact uncorrelated with most traditional financial asset classes. This is quite an interesting property which means that bitcoin’s price doesn’t necessarily follow other asset classes off the cliff when there is a large market downturn. As such, uncorrelated assets are popular tools with investors to hedge their portfolios.
Being an uncorrelated, censorship-resistant asset, it’s quite possible that bitcoin will increasingly adopt the identity of a safe-haven; a lifeboat for capital when the wider markets go sour. But it’s also possible that, when it comes down to the crunch, it will be dumped along with other high-risk assets in favour of traditional safe havens. I suspect the former, although it really depends if bitcoin has had enough time to acquire investor's comfort and safe-haven identity before this is put to the test.
In any case, I think we might find out in 2020.
[Bonus!] Quick-Fire Predictions
- Use of Blockchain in supply-chain applications will gather pace fast, and prove to the naysayers that there are indeed “real-world” uses for BC tech.
- 2020 will be a year of ‘trial-and-error’ experiments for the next wave of ambitious technological upgrades, especially those targeting scalability (e.g. sharding) and interoperability (e.g. inter-blockchain protocols)
- The battle to be the winner of so-called ‘Third Generation’ blockchain-based smart-contract platforms will intensify.
- We will see the first official announcement of a sovereign fund adding a bitcoin allocation to its reserves, although not a G20 country.
- New consensus designs will be proposed with an increasing focus on social and economic incentive structures, as blockchain crypto-economics research increasingly tries to align larger and more diversified collections of different stakeholder groups. Shooting for ‘one-size-pleases-all’ designs instead of ‘one-size-pleases-many’.