While acceptance of crypto-currencies and services within the mainstream financial industry is growing, the sector remains dogged by misconceptions and lack of knowledge, argues Thomas Campione, blockchain and crypto-assets leader at PwC Luxembourg. He says traditional players are starting to consider the business risk of not being involved if they wish to remain relevant to their customers.
In its early stages the crypto-asset movement has been largely driven by retail investors. Why has this been the case, and do you see the sector’s focus changing now and in the future?
While there’s a debate about whether bitcoin was a response to the global financial crisis – the initial work started before the market meltdown – we can fairly say it was an answer to a broader trust issue in the financial system. That trust issue was, and still is, rooted among retail investors, individuals – let’s say the people. What bitcoin achieved is outstanding from that perspective, a trust-less and fully permissionless yet effective financial system. I sometimes feel that technological breakthrough tends to be minimised or simply ignored.
Now we are seeing a shift in terms of players involved with the so-called institutionalisation of the crypto-space, as traditional players strive to meet customer demand and strengthen their competitive position against crypto pure players.
A key question, to which I have no answer yet, is whether traditional players will become crypto-players before or after crypto-players become financial institutions. I believe we are really at a pivotal moment in financial market history.
Advocates of crypto-currencies argue that they are instrumental in democratising finance and investment. Do you agree?
At its core, the value proposition of crypto is to be open to anyone, inclusive by design. There’s certainly an element of democratisation as there is little or no barrier to entry. But until not very long ago, there was not very much you could do with crypto other than buying and holding. Then came decentralised finance and crypto-based financial products, still permissionless, operating 24/7 and doing the job.
Today anyone with an internet connection can obtain a loan using their crypto balance as collateral, anyone can earn a yield by providing liquidity to the market – with a few clicks at any hour of the week. Democratising finance and investment seems the least we can say despite a significant knowledge gap that currently inhibits mass adoption and leaves most people outside the conversation.
The development of bitcoin and other crypto-currencies has been marked by high-profile cases of negligence and fraud that have often left investors out of pocket. Does this justify more stringent regulatory supervision?
We should be very careful about this. Bitcoin for example, has been running like clockwork since the genesis block back in January 2009 – it has never been hacked, compromised or unavailable. Poor or non-existent control environments or AML/KYC processes at some crypto-service providers – with dramatic consequences for customers, no question – must be separated from the underlying assets and technology. There’s something I still struggle to understand about the trust paradox when it comes to crypto, and by extension blockchain. We have a technology designed to foster trust that is held back by trust issues – how crazy is that?
Regulation matters, but it should first enforce a level playing field among the players in the ecosystem, ensure customers protection and market integrity, but be sure to not stifle innovation. There is a multitude of illegal activity taking place on the internet 30 years after its creation and hundreds of billions of dollars or euros are laundered every year through centralised financial systems. Bad guys are everywhere, with or without crypto.
Leading financial groups are starting to offer crypto-asset services, especially for high net worth customers. Does this trend mean the sector is moving into the financial services mainstream? Does the involvement of institutions such as Goldman Sachs, Morgan Stanley and Fidelity mean that “good money is starting to drive out bad”?
Retail investors have been trading crypto for 10 years now, so while institutional players like Morgan Stanley or Fidelity are certainly participating in broadening the crypto footprint, I am not sure that restricting their products to HNWIs is very relevant.
However, I believe the entry of traditional players is instrumental in the reversal of the trust paradox I referred to earlier – “if it is good enough for them, it is certainly good enough for me”. Strictly speaking nothing has changed in terms of the underlying value proposition of the technology, but bitcoin somehow has become more respectable. That said, advances in know-your-transaction capabilities have also contributed to an improvement in the overall perception of crypto.
I would even go further – with $2.5trn in market capitalisation, probably more than 300 million users and a total locked value in DeFi that is constantly increasing, traditional players might run some business risk by not being involved. It is about remaining relevant to their customers.
What signs do you see that crypto-currencies are becoming assets eligible for inclusion in traditional investment vehicles such as actively managed mutual funds and passive exchange-traded funds?
Ultimately it comes down to market demand and the willingness of asset managers to provide crypto products to meet it. ProShares launched the US wave of ETFs a few weeks ago and we expect a dozen of them by the end of 2021. This will have a waterfall effect on other investment vehicles that are more actively traded and with a more tailored investment strategy. Crypto is certainly behaving as a new asset class, albeit one with limited past performance data, so my question would be: Why shouldn’t crypto be an eligible asset?
Crypto-assets have been associated with wild price swings and short-lived bubbles. Are they likely to become more stable and predictable in the future?
Regarding bubbles, I would argue that it all depends on one’s perspective. Personally, I see bitcoin and the other main crypto offerings on an upward trend since day one. But as an asset historically traded mainly by non-professional investors, and given the existence of ‘whales’ able to precipitate significant price movements, behavioural biases can drive markets crazy.
However, I believe that other things being equal, the entry of institutional players, which in theory are better able to manage these biases and to stick to an investment policy, should reduce average volatility on crypto markets. And those looking for stability have stablecoins that can be staked or lent. Crypto is no different from traditional assets when it comes to risk/return considerations.
Many mainstream economists and commentators argue that crypto-assets have no intrinsic value or role in the global financial system. Do you agree? What purpose(s) do you see for crypto-assets?
This is a never-ending debate. The value of bitcoin is what people are ready to pay for a decentralised, censorship-resistant, permissionless and disinflationary financial system that they can trust. Fiat currencies value is derived from the trust people have in the issuing government and its backing, nothing else.
At the end of the day, the trust question is central to the value of both crypto and fiat currencies, and so is the network effect. People scratching the surface on crypto may say Bitcoin is valueless because it has nothing underlying it. That’s true, but anyone exploring the way Bitcoin works quickly realises that the absence of underlying is irrelevant. Around the clock instant peer-to-peer value transfer, transparency, immutability and limited supply are its intangible value drivers.
Could innovations launched by public sector or supranational entities, such as central bank digital currencies, prevent private sector crypto-assets becoming part of the financial mainstream and restrict them to a relatively small community of enthusiasts and/or politically motivated advocates?
That’s currently the trillion-dollar question. Will central bank digital currencies kill crypto, will Western countries follow China? I tend to believe that crypto will remain an alternative value proposition to CBDCs, which ultimately will still reflect fiat currency monetary policies and be subject to the same weaknesses, such as inflation of indebtedness.
In addition, I trust Western economies to adopt a more supportive stance toward financial innovation while ensuring market stability through regulation. I don’t believe in a situation where CBDCs would be for the mainstream and crypto back in the underground.
The use of blockchain to record crypto-currency transactions has prompted criticism in the past that distributed ledger technology cannot deliver the speed required by today’s financial industry. Is this true? Or is technological innovation providing a solution?
The scalability and more broadly the transactional performance of crypto faces many myths. Not only do certain blockchains natively provide high transactional throughput but the oldest ones such as Bitcoin or Ethereum have developed so-called layer 2 solutions which, in a nutshell, resolve transactions speed and cost issues. These criticisms are meaningless today.
Bitcoin mining has been criticised for the volume of energy it consumes, contributing to the crackdown on the sector in China. Can crypto-currencies fit with global decarbonisation goals?
Here again we should be careful. Only a fraction of crypto uses the so-called proof-of-work consensus mechanism, which is indeed energy intensive. Let’s not conflate energy consumption and carbon footprint – the energy used for mining is mostly renewables and excess energy.
Let’s also look at the energy consumption of crypto overall relative to the volume of transactions it handles, compared with traditional finance’s global energy footprint, to lay the ground for a more informed discussion. Putting things into perspective is extremely important when discussing crypto’s energy consumption. For example, transmission and distribution electricity losses in the US alone could power the whole Bitcoin network almost twice over.
Crypto-currency development remains relatively modest in Luxembourg, but the CSSF has demonstrated its willingness to authorise and oversee service providers, and partnerships have been established such as PwC’s link-up with security token platform Tokeny. How do you see the sector evolving and growing in the future, especially given Luxembourg’s ambition to become a hub for fintech start-ups?
Relative to the size of the country, we have a very broad and valuable ecosystem including crypto-exchanges, tokenisation platforms and a blockchain lab, and a regulator encouraging financial innovation through a dedicated innovation hub. Overall Luxembourg has nothing to be shy about. We may be less mature than Switzerland or Hong Kong, but I am confident in Luxembourg’s ability to seize the regulatory opportunities that will materialise in the short and medium term in Europe and quickly catch up.
What is currently missing in Luxembourg is a clear dynamic across the traditional financial sector, such as banks, asset management and assets servicing, but I feel things are about to liven up.
Thomas Campione is the blockchain and crypto-assets leader at PwC Luxembourg, supporting traditional and blockchain/crypto-native players in addressing challenges in the field and helping them bridge the gap between the traditional and decentralised economies. Thomas began his career in 2008, working on investment funds auditing, and has more than 11 years of experience in advisory and assurance services to local and international financial institutions and multinational corporations.
Within the PwC network, Thomas is the Luxembourg representative in the PwC Crypto Accounting Working Group, PwC Global Crypto Committee and Global Blockchain Community. He is a director within PwC Luxembourg’s Capital Markets & Accounting Advisory Services business, specialises in financial instruments and blockchain and crypto-assets. He is a qualified Chartered Financial Analyst and successfully completed the blockchain technologies executive programme at MIT School of Management.
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