Crypto trust is key for survival

Cryptocurrencies have been catapulted into public awareness, but the volatility and controversies surrounding them have created a distrust that must be overcome

There is no doubt the huge hype and widespread awareness around cryptocurrencies have contributed to the drastic volatility in their value. Awareness doesn’t always equate to understanding and notoriety can easily have negative connotations. In the case of this burgeoning market, crypto trust is the currency to achieving its ultimate potential.

The same attributes that have driven the rise of cryptocurrencies, most notably that they aren’t backed by governments or central banks, but rather by mathematical proofs, have also created public scepticism.

Once regulation is in place, we will see more big players, including banks and other financial institutions, enter the market

The promise to bypass the centralised economic system and enable peer-to-peer payments has yet to be achieved. The massive price swings make it impossible to use cryptocurrencies as genuine forms of value exchange, while the limited scalability and excessive costs of mining have held back the ability to complete time-sensitive transactions with the scale of regular payment systems, such as Visa and Mastercard.

Exchanges and tokens have fallen victims to a myriad of hacks and some still associate cryptocurrencies with the dark-web activities that defined their early existence, specifically to buy and sell drugs online anonymously. The infamous online black market Silk Road was shut down by federal agents in 2013.

Public perception still getting in the way of crypto trust

“People are still afraid of cryptocurrencies,” says Pavel Matveev, founder and chief executive at Wirex, a hybrid personal finance platform trying to bridge the gap between the fiat and cryptocurrency worlds by merging blockchain technology and traditional finance. “Most people believe it’s crime or ransom money, so it takes effort to change this perception.”

Controversies surrounding initial coin offerings (ICOs), where businesses raise funding for projects or startup companies by selling cryptocurrency coins to investors, have caused further damage to public perception. Despite an abundance of scams and the failure of most projects, ICOs attracted a record $12 billion in the first half of 2018. But a study by Statis Group found more than 80 per cent of ICOs in 2017 were scams.

“ICO scams started booming about a year-and-a-half ago,” says Mr Matveev. “All you needed was a ten-page white paper to raise billions of dollars. Most ICO companies are after quick money rather than building their business in the first place. They’re robbing people of their money and then disappearing. Very few ICOs are worthwhile.”

Cryptocurrencies have enormous potential, in spite of bad reputation

This abundance of fraudulent activity, bad players and failed ICOs have damaged crypto trust. The cryptocurrencies space, especially the Altcoin market, is highly manipulated. Yet it still has enormous potential and progress is being made.

Cryptocurrency use-cases are still predominantly limited to speculative trading and investments. There simply aren’t enough applications and real use-cases solving everyday life problems. However, blockchain has already proven it can be applied in different areas and the number of blockchain-crypto projects at the proof-of-concept stage is growing. More production-ready products will have a positive impact on public perception.

Along with this, growth in the number of enterprise exchanges and institutional investors exploring the market is ever so gradually making cryptocurrency trading more professional and less volatile. To accelerate this and gain crypto trust that currencies require to thrive, more regulation is crucial.

“Once regulation is in place, we will see more big players, including banks and other financial institutions, enter the market, which will bring more crypto trust to the industry in general,” says Mr Matveev. “Japan, for example, has already established clear rules around cryptocurrency trading and taxation. As a result, banks are doing crypto business and the country has become one of the leading markets for crypto trading.

“Cryptocurrencies will also be regulated in Canada very soon and the US Securities and Exchange Commission is planning to regulate ICOs, so once we have clear rules then security and fraud issues will start to be eliminated. I believe we will see crypto regulations in the main markets within the next two years. Regulations will protect customers and investors, and eliminate the bad players within the industry.”

ETFs and new regulation could revive crypto trust

The ability and the willingness of the regulatory agencies to implement a full-scale and fair discussion on the diffusion of cryptocurrencies is vital to increasing public crypto trust. Retail users don’t necessarily have all the knowledge and instruments to defend themselves from fraudulent behaviours and market manipulation.

The introduction of an exchange-traded fund (ETF) tracking the cryptocurrency market would allow institutional investors to enter the market without a direct exposure on the single currencies or without even knowing the underlying protocols and features.

According to Daniele Bianchi, assistant professor of finance at Warwick Business School, that would open the market to a much higher money flow and increase price informativeness, as well as reduce volatility and investors’ asymmetric information.

However, without proper regulation, ETFs can’t be effectively and securely introduced on a global scale. Regulatory approval and monitoring are key aspects to increasing the use and trust of cryptocurrencies, especially as an investment vehicle.

Navigating the crypto universe is confusing even for the professionals

“It is difficult for professional investors and market participants to differentiate between what can and can’t be trusted, let alone for the public and regular businesses,” says Mr Bianchi. “There is a growing ecosystem of auditors, ratings agencies and experts that can, and certainly will, help the public to understand more and more the cryptocurrency universe. Nevertheless, this ecosystem is still massively underdeveloped and to a large extent not fully regulated.”

Regulation and positive use-cases will create a more stable market, and increase public awareness and acceptance of the real value of cryptocurrencies. However, it will take time for perceptions to move on from the events and volatility that have caused most people to stay away from this market. Only when coverage moves from the issues and scams of cryptocurrencies to more critical appraisal of the widespread benefits they can provide will they truly gain the trust of the public.