Cryptocurrency Evolution: Adoption Rates, Regulatory Approaches and Attitudes Towards Risk

The cryptocurrency market’s rate of adoption is astonishing. With more than 100 million people around the world invested in them and the number of Blockchain wallet users worldwide at an all time high of 76 million in September 2021, this market is indubitably on its way into the mainstream.

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However, this popularity increase in the asset, based on shifts in general attitudes towards the level of risk associated with them, has steered multiple governments towards applying a greater level of regulatory scrutiny to cryptocurrencies. The ensuing search for a stable framework of regulation and monitoring is important because it gives rise to two salient issues: is regulation needed at all, and if so, what might be the best regulatory approach?

According to Statistica, the largest names in the cryptocurrency market are currently:

Adoption Rates

Cryptocurrencies were first conceptualised in 2009 by Satoshi Nakamoto with the creation of Bitcoin, the original decentralised currency. This was swiftly followed by the emergence of rival ‘altcoins’ from 2011 (such as Litecoin and Namecoin) which tried to improve on the original design of Bitcoin and offer some advantages over it, such as faster transaction times or enhanced anonymity.

Nevertheless, the core ethos endorsing cryptocurrency remains the creation of a safe and anonymous method of currency transfer between users, its initial goal in 2009. Since then, cryptocurrency is finally reaching mainstream adoption globally, with the WEF citing its growing adoption in developing countries.

In the last year alone, the African crypto market grew by over 1200% in the value received; it is estimated that around $105.6 billion worth of cryptocurrency was received by African countries between July 2020 and July 2021. Furthermore, a Statista report found Nigeria owned the most out of emerging countries: nearly a third of its population owned some form of crypto. High rates of adoption were also found in: Vietnam, Turkey and South Africa.

The main factor contributing to the widespread acceptance in these developing countries is the chance at financial inclusion. According to the World Bank, nearly one-third of the world’s adults don’t have access to traditional banking services, the majority of which are concentrated in these countries. Since a software wallet is all that is needed to make use of cryptocurrency, many facing difficulties with formal financial services are turning to it instead.

Moreover, the mass adoption of mobile phones and internet in developing countries (two-thirds of the ‘unbanked’ 2 billion have mobile phones), has indirectly led to the increased adoption of cryptocurrency. Add to this that the exchange of money through cryptocurrencies is easier and cheaper, rendering it more affordable for people living a middle standard of living in developing countries, and it’s no wonder they are so widespread.

With that said, this increased interest in cryptocurrency is not limited to these developing countries. Institutional investors are beginning to observe it more closely, and it is coming to be viewed as an increasingly legitimate safeguard against currency instability and the risk of inflation. Managers like Skybridge, Blackrock, and Tudor have all announced the addition of crypto to their portfolio, and even the launch of funds dedicated to it.

It is expected that this surging interest will continue to grow, kicked off by the rising number of new uses for crypto, as well as extensive acceptance by traditional banks. Its increased adoption coupled with greater innovation bodes well for the democratisation of the financial system. However, it also means cryptocurrency can no longer be ignored by regulators.

Attitudes Towards Risk

Cryptocurrency investing is risky because of its frequent episodes of volatility. Despite its often tumultuous journey in price (e.g. Bitcoin fell from $60,000 in April 2021 to $30,000 in May, then rose back to $50,000 by September 2021), mainstream attitudes towards the risk of cryptocurrency are changing. This arises as eyes are opened to its many applications.

For example, stablecoins are a type of cryptocurrency that can be pegged to other assets (i.e. the U.S. dollar), and in so doing, protect them from drastic devaluations. Anyone living in Nigeria would have lost nearly 50% of their net worth since 2016 as a result of the Nigerian Naira plummeting from 200 N per USD to a record low of 527 N per USD in August 2021. However, had these assets been invested in a stablecoin pegged to the USD no such loss would have been suffered.

Alongside the protection of assets, cryptocurrency is also a potent grower of wealth. It grants access to stocks such as Apple, Amazon and Tesla to anyone in the world with tokenised stocks. These tokenised variants of traditional stocks allow users to buy fractional portions of a token, which equates to a portion of a stock. Suddenly, the requirement for a large amount of investable assets in order to access such wealth-building tools has been vanquished and can be invested in with as little as $5.

These attitudes towards risk are mirrored by mainstream institutions, who are beginning to recognise cryptocurrency as a credible asset class. Rick Rieder, BlackRock’s chief investment officer of global fixed income has previously gone on record in support of cryptocurrencies by stating that “[he] thinks it could have some real upside [and that] … it’s an asset class [he] thinks is durable”.

Other major players from the traditional finance sphere are starting to recognise the shift that is occurring: Morgan Stanley is considering funding bitcoin with its $150 billion investment fund, BNY Mellon and Deutsche Bank are offering crypto custody and JPMorgan has admitted it will have to be involved in bitcoin.

This increased participation of financial institutions in cryptocurrency is expected to only lead to greater success and acceptance generally. With the support of these traditional firms, who are comfortable liaising with the red tape and political games of regulation, there is a greater chance of a regulatory framework being established that is tailored and favourable for crypto.

Regulatory Approaches

Cryptocurrencies are being faced with greater regulatory scrutiny now than ever before. Bitcoin’s volatile price changes are feeding the concerns of financial regulators regarding the absence of a regulatory framework for this swifty developing market. The G7, ECB and UK CFA have all expressed concerns about the unregulated growth of crypto, primarily bitcoin.

Regulation of cryptocurrency is still lagging behind in many countries. Many haven’t yet passed specific legislation or regulatory guidance for the sector holistically, while others are biding their time with a step-by-step approach. However, the attitudes of regulators are changing; officials worldwide have expressed worries about the lack of regulation over the growth of cryptocurrencies.

Central banks and regulators do not agree that crypto can be described as a currency, but a highly volatile asset. This volatility is caused by small volumes in the market and the influence ‘whales’ possess over its value because of their concentrated holdings. It is almost unanimously agreed that retail investors should be protected against this, and a regulatory framework can achieve this.

The broad trend in regulation appears to be more favourable towards cryptocurrency, with governments attempting to package it as a less risky product for consumers. This comes as regulators begin to notice that crypto is here to stay, and adapt their policies accordingly. For example, crypto took a step closer to mainstream exposure when PayPal announced it would allow US customers to hold, buy or sell Bitcoin, Litecoin, Ethereum and BitcoinCash.

The Next Frontier

Considering regulators to date: In the US, theOCC take on interest bearing accounts to date largely focussed on conventional methods excluding cryptocurrency. Other countries are more pro cryptocurrency and are very open about it. Looking to the future, the next frontier of money-making opportunities in crypto appears to have been presented by interest earning platforms. Several businesses (such as Hodlnaut, Nexo or BlockFi) offer interest bearing accounts that remunerate account holders in the cryptocurrency they fund their account with. In fact, platforms like Hodlnaut allow users to earn interest in the cryptocurrency of their choice from the six supported assets including Bitcoin and Ethereum.

The interest rates for these accounts will differ based on the selected cryptocurrency, and interest on most accounts should accrue on a weekly basis or shorter. This is optimal for investors since compounding interest allows for much faster account growth. Given the way compounding interest works, this means time is in the user’s favour since the longer money is kept invested, the faster it will grow.

Thus a clear benefit of using crypto to earn interest are the competitive rates offered. It is unheard of for a traditional savings account to offer anywhere near to yielding 7% interest, but since a blockchain cuts out overhead costs, higher interest rates are able to be offered. Additionally, there is no minimum lock up time on crypto funds and no minimum account required to open such interest bearing accounts.

That being said, there are disadvantages to earning interest on crypto, namely that the floating interest rates don’t guarantee they will stay high in the long-term, and that if the cryptocurrency held by the user depreciates, so too must the earned interest.

It has been asserted by Elon Musk (and many other bitcoin critics for years) that another disadvantage of cryptocurrency is that it is bad for the environment as it pollutes the planet. However, research by Cambridge University reflects that the damage is not nearly as bad as suggested.

Since large scale miners are competing in an industry with low-margins, where the only cost that can vary is energy, they are motivated to migrate towards the world’s cheapest sources of power in order to be profitable. The first six months of 2021 saw America jump from fifth to second place globally for the region with the most crypto miners. This is likely due to the fact that green energy is on the rise in the U.S, and as illustrated by Lazard’s 2020 report, most renewable energy sources are either equal to or less expensive than conventional sources.

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