The crypto revolution is accelerating, isn’t it?

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As mon­ey changed from coins to paper notes and dig­i­tal, and full decen­tralised with­out any cen­tral author­i­ty to con­trol, the ever-evolv­ing phe­nom­e­non of mon­ey is unstop­pable. The dig­i­tal surge sparked by the pan­dem­ic is also dri­ving a trans­for­ma­tion in busi­ness and finance. And as more and more of the world’s spend­ing shifts online, cash trans­ac­tions may dis­ap­pear with­in the com­ing decade.

Mar­ket Capitalisation 

From 11,145 dif­fer­ent cryp­tocur­ren­cies in June 2021, it has surged to 18,635 on March 31, 2022. With the sig­nif­i­cant growth in cryp­tocur­ren­cies, the mar­ket cap­i­tal­i­sa­tion man­aged to lev­i­tate around $ 2.159 tril­lion on March 31 from $ 2.2 tril­lion in Sep­tem­ber 2021 amid large bouts of price volatil­i­ty. The mar­ket cap­i­tal­i­sa­tion of cryp­to assets today has grown ten­fold com­pared to 2020, and Accord­ing to the ‘Glob­al Finan­cial Sta­bil­i­ty Report’ issued in Octo­ber 2021 by the Inter­na­tion­al Mon­e­tary Fund, mar­ket cap­i­tal­i­sa­tion has grown by a fac­tor of 10 and the size of DeFi locked esca­lat­ed from $ 15 bil­lion at the end of 2020 to $ 110 bil­lion as of Sep­tem­ber 2021.

With blockchain tech­nol­o­gy becom­ing more and more pop­u­lar, the num­ber of cryp­tocur­ren­cies is expect­ed to increase fur­ther whether they are sig­nif­i­cant or pump and dump cryptos.

Reg­u­la­tion and Taxation 

In 2018, a num­ber of trad­ing plat­forms closed their doors after the Reserve Bank of India intro­duced mea­sures to stop finan­cial insti­tu­tions from facil­i­tat­ing cryp­tocur­ren­cy trans­ac­tions. In the ensu­ing months, trad­ing vol­umes began to recov­er after the ban was over­turned by the country’s Supreme Court. With a vari­ety of cryp­tocur­ren­cies, each run­ning on dif­fer­ent blockchain tech­nol­o­gy and with its own wal­let, ban­ning has not worked so far. Recent­ly, Nir­mala Sithara­man, Finance Min­is­ter of India, pro­posed a 30% cap­i­tal gains tax on any prof­its they made from sell­ing their dig­i­tal assets. How­ev­er, loss­es can­not be off­set against oth­er taxes.

Bank of Eng­land start­ed draft­ing the country’s first reg­u­la­to­ry frame­work in March, cit­ing the pos­si­bil­i­ty that cryp­tocur­ren­cy growth could threat­en finan­cial sta­bil­i­ty in the coun­try. From the pri­ma­ry focus on curb­ing mon­ey laun­der­ing and ter­ror­ism fund­ing, reg­u­la­tors are look­ing beyond this to pro­tect con­sumers as well as main­tain the sta­bil­i­ty of the finan­cial system.

The Orga­ni­za­tion for Eco­nom­ic Coop­er­a­tion and Devel­op­ment (OECD) is advanc­ing a cryp­to-asset report­ing frame­work that is aimed to help gov­ern­ments reg­u­late and cap­ture tax. The cryp­to report­ing frame­work is expect­ed to sub­mit to the 17th group of G‑20 which is going to take place in Novem­ber 2022 in Bali, Indone­sia. The frame­work will con­tain how cryp­tocur­ren­cy can be char­ac­terised from a tax point of view, its legal sta­tus, and tax con­se­quences at dif­fer­ent stages from cre­ation to dis­pos­al of cryp­to assets. Bank of Japan recent­ly calls G7 nations to adopt com­mon cryp­to regulations.

Glob­al Adop­tion Rate

Research from the crypto.com exchange shows that the num­ber of glob­al cryp­to own­ers reached 106 mil­lion in Jan­u­ary 2021, surged to 295 mil­lion in Decem­ber, and is expect­ed to reach one bil­lion by end of 2022. The adop­tion growth in the sec­ond half of 2021 was 37.5%, a 13% increase over the same peri­od in 2020 (33.3%). With such rapid adop­tion of cryp­tocur­ren­cies, con­ven­tion­al banks are at risk as people’s strate­gies for stor­ing mon­ey shift from con­ven­tion­al banks to cryp­tos. This would fur­ther dis­rupt the ecosys­tem of con­ven­tion­al banks.

Cen­tral Bank Dig­i­tal Currency 

With the expo­nen­tial growth of cryp­tocur­ren­cies, mon­e­tary author­i­ties across the globe are push­ing the devel­op­ment of Cen­tral Bank Dig­i­tal Cur­ren­cies. Accord­ing to the Inter­na­tion­al Mon­e­tary Fund, over 100 coun­tries are explor­ing the CBDC in order to com­bat the rise of DeFi. While some cen­tral banks are still research­ing CBDC, coun­tries like Chi­na are test­ing it, and a few have already begun dis­trib­ut­ing it to the pub­lic. Research and analy­sis on mon­ey and pay­ment by the Inter­na­tion­al Bank for Set­tle­ment pub­lished in Jan­u­ary 2022 indi­cate that 80% of inter­na­tion­al cen­tral banks are look­ing at CBDC, and half have moved beyond con­cep­tu­al research to exper­i­men­tal and pilot work.

Even though CBDC is heav­i­ly crit­i­cized as “con­trolled anonymi­ty”, glob­al mon­e­tary author­i­ties have uncov­ered that the only way to chal­lenge, main­tain, and ampli­fy mon­e­tary pol­i­cy is through CBDC. Euro­pean Sys­tem of Finan­cial Super­vi­sion pub­lished in Jan­u­ary 2022, stat­ed that the issuance of retail CBDC will be one of three sce­nar­ios for the finan­cial sys­tem in 2030. The Bank of Eng­land is the lat­est bank to sig­nal its inter­est in explor­ing the poten­tial ben­e­fits of a CBDC, and it has decid­ed to col­lab­o­rate with MIT on the devel­op­ment of CBDC.

As a mea­sure to curb finan­cial insta­bil­i­ty and pre­vent the hoard­ing of dis­pro­por­tion­ate sway by the devel­op­ers with­in the DeFi ecosys­tem, CBDC is the most appro­pri­ate and time­ly solu­tion for mon­e­tary authorities.

The DeFi ecosys­tem is under­go­ing a fierce race for dominance

In Jan­u­ary 2022, Bloomberg report­ed that Ethereum is cur­rent­ly engaged in an intense race to main­tain its dom­i­nant posi­tion in Decen­tralised Finance (DeFi), and by the end of 2021, it lost 30% of the mar­ket share. Such a decline in the dom­i­nance was that the oth­er improved blockchains have gained most mar­ket share in the space of decen­tralised finance.

As the trans­ac­tion fees asso­ci­at­ed with Ethereum blockchain are high, devel­op­ers have been try­ing to switch to a scal­able mech­a­nism called “proof of stake” and shard­ing. How­ev­er, both process involves eas­i­ness in the exploita­tion of DeFi ecosys­tem by nefar­i­ous actors. This has dis­cour­aged the devel­op­ers to make the changes. As a result, blockchains like Solana and Avalanche are more like­ly to dom­i­nate DeFi ecosys­tems than to coex­ist with the Ethereum in future. With scal­a­bil­i­ty of 710k Trans­ac­tions Per Sec­ond (TPS), pop­u­lar blockchain like Solana is con­sid­ered the fastest blockchain tech­nol­o­gy ever developed.

Cryp­to crime 

A hack of Mt. Gox, a cryp­to exchange plat­form in 2014, led to the theft of 850,000 bit­coins. Two years lat­er, Bitfinex lost 119,754 bit­coins and in Feb­ru­ary 2022, after six years, the Jus­tice Depart­ment of the US seized the stolen bit­coins linked to Bitfinex.  The exploit of Poly Net­work in August 2021 was also report­ed, while the raid on Ronin Net­work results in the theft of 173,600 ETH and 25.5 mil­lion USDC on March 23, 2022. The Ronin Net­work hack is the largest cryp­tocur­ren­cy breach ever record­ed. It was tweet­ed that hack­ing was attrib­uted to a small num­ber of val­ida­tor nodes that have result­ed in the com­pro­mise of security.

As cryp­tocur­ren­cies and their pop­u­lar­i­ty rise, fraud­u­lent scams such as rug pulls are also on the up. Accord­ing to Ellip­tic, one of the lead­ing providers of cryp­to asset risk man­age­ment solu­tions, the decen­tralised finance users and investors lost an equiv­a­lent of US$ 12 bil­lion as of Novem­ber 2021. Chain analy­sis, the blockchain data plat­form, in Feb­ru­ary 2022 pub­lished that the amount of cryp­tocur­ren­cy stolen from indi­vid­u­als and ser­vices in 2021 was the almost sixth time as the amount stolen in 2020. Peck­Shield, the industry’s lead­ing blockchain secu­ri­ty com­pa­ny, reports code and eco­nom­ic exploits that occur every week on decen­tralised finance. The com­pa­ny which pub­lished an analy­sis of decen­tralised finance plat­form attacks report­ed that OpenSea which oper­ates an online NFT mar­ket­place was tar­get­ed by phish­ing on Feb­ru­ary 19 and NFTs worth 1200 Ethereum were stolen. As the cryp­tocur­ren­cy trans­ac­tions are pub­licly acces­si­ble, it leaves a trail that eas­es trac­ing the hack­ers and scam­mers. Recent­ly 11 cryp­to exchanges plat­forms were accused of tax eva­sion in India.

The rapid advance­ment of blockchain tech­nol­o­gy makes it dif­fi­cult to pre­dict how far the cryp­to rev­o­lu­tion will go. How­ev­er, it has the poten­tial to trans­form how mon­ey works and by exten­sion, the dig­i­tal econ­o­my as a whole.

Con­tributed by

Pema Wangchuk

Thim­phu

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