Bitcoin and blockchain have evoked mixed reactions for many years now. After it was first unveiled in 2009, bitcoin was widely dismissed as a speculative bubble that was bound to burst and cryptocurrencies have remained largely a fringe activity since then. Meanwhile, broader attention has focused on the opportunities that might be derived from the underlying distributed ledger technology. China and India are so against the new technology they have decided to impose complete bans on crypto trading.
In more recent months, however, countries such as Japan have proactively embraced digital currencies, and the same commercial banks and investment banks that had previously decried crypto as the mother of all bubbles are discreetly realigning their positions. Driven by recent volatility and the gradual transition of crypto into a professional asset class, many are now actively investing in bitcoin and blockchain as they realise the scale of the opportunities.
This has the potential to completely reshape traditional financial markets as we know them. Cryptocurrencies bring new technologies, new markets and new systems, driven from the ground up by market practitioners and individual investors rather than by central banks or governments. If cryptos continue to evolve at the current pace, this could bring about a revolution in the way financial services are delivered and consumed. The digitisation of assets has the potential to democratise often closed investment areas, giving the general public access to markets and products in a way which has not happened before.
The bulk of investment in blockchain and digital currencies so far has come not from the official sector, but rather through unconventional channels such as crowdfunding. Initial coin offerings generate the capital to develop new crypto assets, but they are often being bought by inexperienced investors who have never previously owned a stock, bond or currency. In other words, the technology on which the financial services system could one day come to depend is owned not by central banks, governments or professional investors, but rather by members of the public.
The financial services sector is well accustomed to change, of course, and big financial centres have historically been driven to adapt by new products, technology and shifts in demand. The advent of electronic communications, for example, allowed hedge funds to move from the City of London to Mayfair and from Wall Street to Boston. The building of Canary Wharf in London and most recently Hudson Yards in New York has further dispersed historically famous financial centres.
The development of blockchain and cryptocurrencies could be even more disruptive, further diminishing the role of New York, London, Tokyo, Shanghai and Singapore as leading financial centres. Many of these cities have retained their pre-eminence because of the liquidity they manage and the high concentration of banks, technology and buy-side firms in those areas.
Blockchain has no such physical constraints when it comes to liquidity or technology. The beauty of a distributed ledger is that it can be accessed and amended anywhere, with no need to concentrate around existing financial centres. Each chain is equivalent to a new financial ecosystem and investors are closely watching the space to identify which will endure for the long term. From complicated investments to retail operations, it offers a new transparent, accessible way of managing data.
Up until now, main centre regulators have largely focused their attention on concerns over fraud and market manipulation associated with cryptocurrencies and initial coin offerings. This is, of course, absolutely right, and they are aware of the potential opportunities provided by blockchain to promote greater transparency, security and ease of access for a broader spectrum of investors and traders. In the long run, it is those agencies with the foresight to investigate these benefits properly, rather than simply outlawing or constraining crypto trading, which will drive the best results for their markets.
The speed and scalability of blockchain cannot yet meet the demands of most modern financial systems, but this is bound to change. With the volume of financial and human resources now being pumped into the technology, it is advancing very quickly. The priority for main centre market practitioners and regulators should be to recognise that blockchain is here to stay and looks set to become an integral part of mainstream trading. If they do not adapt these developments, they will find smaller, more dynamic financial centres stealing a march.
When major investment banks are allocating substantial resources to develop their own blockchains, we know things are changing
As with every innovation, there is a tipping point, a switch in sentiment and understanding that leads to bigger changes. We believe that tipping point for crypto is very close. When major investment banks are allocating substantial resources to develop their own blockchains, we know things are changing. The market volatility is now understood and investors are looking past the market fluctuations at long-term value – and the official sector is now doing the same.
For more information please visit www.adss.com
Revolution not anarchy
“Anti-establishment, libertarian and revolutionary – all words which have been used to describe cryptocurrencies and the rise of blockchain technology. From the moment it was formed through to the meteoric growth in the people and firms associated with crypto, the message has always been that this will change the world. And it will do this without the need for government intervention or regulation,” says Philippe Ghanem, vice chairman and chief executive of ADS Securities.
“It is the intellectual freedom which has created the phenomenon we see today; however, can it really be unregulated? If it is setting out to change the way that financial services operate, taking control from governments, politicians and leaders, and putting it in the hands of the masses, can this be achieved with no judicial or social controls?
“The answer is of course no. This does not mean that the same types of regulation which are applied to fiat currencies need to be in place. However, like water cascading down a hill, its power and purpose can only be captured and controlled when it is channelled and directed.
“We are now in a period of its development when as many new ‘regulatory’ bodies are being formed as new coins issued. This tells me that there has to be governance. Systems are needed which set the boundaries and rules required to protect companies and individuals.
“However, no central bank or entity is controlling distributed ledger technology. For example, looking at bitcoin, investors hoarding the coins – typically the first movers – and institutionalised miners using huge computing power have become the de facto major players influencing market prices. This is already a broken model.
“There is also a finite cap of 21 million bitcoins – at this stage about 17 million coins have been mined – so this risk of concentration means bitcoin cannot be compared to any other market; it’s efficiency and attractiveness are compromised.
“We have to hope the emergence of new tokens and market participants, typically smaller but more numerous individual investors, speculators and more traditional institutional players, will take a bigger market role. Ultimately, it is the spread of the technology and increased market access, government regulation, transparency and liquidity which will make blockchain an essential part of the financial services world.
“History tells us that revolutions do not cancel all rules, they reset them, and this is what has to happen with crypto.”