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.
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.
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