NFU Blog

Cryptoassets – Revolutionary or status quo by another name

With ‘crypto’ grabbing headlines on a daily basis and Bitcoin currently trading at about $68.000 the bitcoin, there is little doubt, that cryptoassets have come to stay. But what exactly are they, for what are they used and what does their popularity mean for the global financial system? Let’s take a look.

Cryptoassets, commonly known as cryptocurrencies, have grown exponentially in recent years. Where only 66 different assets were registered in 2013, there currently exists about 7.557 different ones[1]. Bitcoin is by far the highest valued and used, with the closest runner up being Etherium, trading at about $4.800 the unit. Other commonly mentioned assets like Dogecoin (Made famous by Elon Musk pushing them heavily) or SquidGame (Created after the success of the Netflix hit-series by the same name) rank at #9 and #2721 respectively. While Bitcoin was the first cryptoasset to be launched, back in 2009, each asset has its own purpose. Where Bitcoin was meant to function as a virtual currency, allowing users to circumvent the traditional finance sector and controls of fiat currencies, Etherium was designed with smart contract functionality in mind. In other words, it was meant to be used as a means of exchange when concluding smart contract[2].

Yet other assets have been designed purely as investment vehicles or to serve a myriad of other purposes. Many countries and national banks are in fact working on their own versions of cryptoassets, known as stablecoins, creating virtual equivalents of their own fiat currencies. China is looking at launching an electronic Yuan, as is Israel with the digital Shekel, and more close to home, Sweden is contemplating an E-Krona. How these currencies will be received when they become available and what impacts they will have on the markets is hard to say, but they will for sure further change the relationship we have with money.

Countries have even gone as far as to allow Bitcoin to be used as legal tender, with El Salvador being an example of just how difficult it is for society at large to come to terms with cryptoassets. In a country where less than half of the population has access to the internet, it seemed like an odd choice to be the pioneer in making Bitcoin legal tender on par with the US Dollar, and the international markets responded quickly, downgrading the Salvadorian debt in July 2021[3]. Other countries have taken different approaches, with the Swiss canton of Zug accepting taxes paid in Bitcoin, and Argentina allowing passengers on public transport to pay for their tickets in Bitcoin. How exactly they deal with the significant fluctuations in the value of Bitcoin on a day to day basis is an interesting experiment, but it goes to show that the use of cryptoassets is starting to creep out of the purely digital world, if only by increments.

If we look at the percentage of people actually owning or using cryptoassets, we see interesting developments. The country with the highest percentage of people reporting to have used or owned one or more types of cryptoassets in 2020, is Nigeria, with 32% or 1 in 3 responding positively[4]. This is a huge difference from usage in Europe and North America, where the average ownership was about 7.2% in 2020[5]. Will these differences equalise over time? Probably, in no small part helped by stablecoins and Big Tech possibly moving into cryptoassets. But at least so far, in most Western countries, using cryptoassets is still a pretty niche affair and not as widespread as you might sometimes get the impression.

The promise of crypto

Having said that, let’s take a look at some of the benefits that are often associated with cryptoassets.

According to the initial participants in developing cryptoassets, the decentralised nature of these assets is their greatest benefit. By creating virtual currencies that could be used all over the world, people are able trade with each other across the globe and without having to pay transaction fees and exchange rates. All while being completely removed from the financial institutions and government oversight. In some ways ‘democratizing’ money if you will, for the benefit of everyone. Some proponents still hold onto this goal, even if it today is probably an increasingly small group. When companies like Blackrock start buying up Bitcoin as investments, chances are that the philanthropic basis is eroding pretty fast. However, in all due fairness, the potential for cryptoassets to be used for ‘good’ will always be there. Remittances could, under the right circumstances, be sent across the globe at lower prices than commonly in use today.

Likewise, crowdfunding and DeFi (Decentralized Finance), could serve to service the unbanked as well as lower barriers to entering the financial markets and eliminate financial fees. The problem though, is that while this is often the stated goals, when it comes to practice, a different story emerges. For DeFi in particular, one observer recently remarked, that ‘As defi continues to expand, it risks embracing the very ideology it initially sought to reject as the primary beneficiaries of this new financing paradigm are those who already own digital assets’[6]. Meanwhile, the Dutch bank, ING has recently started its own DeFi lending project, showing the way that many of these technological developments start out as ways to gain distance from the organised financial markets, only to be adopted by these same financial actors[7].

In the same vein, in 2018, finance ministers from the G20 expressed their cautious optimism about the impact that cryptoassets could have on the world economy, while also noting the current ‘Wild West nature and volatility of the market’[8]. One should therefore make sure to take with a large grain of salt, the promises made by the main proponents of these assets, but we should as a society neither allow our scepticism to completely take over. ICOs (Initial Coin Offering) can allow startups to raise capital through issuing virtual ‘tokens’, which can be bought for cryptoassets or legal tender. This can allow companies that can’t get traditional financing access to needed capital, which if done for the right reasons can allow some less traditional companies to flourish. I.e. Lithuania’s economy grew by 3.9% in 2018, ahead of the 2.3% EU average, largely thanks to ICOs issued in the country raising half a billion euros that year alone[9]. However, once again, while ICOs have been used for charitable fundraising, significant sums have also been scammed out of investors in recent years, leading some countries to temporarily ban ICOs and many planning to heavily regulate them.


The danger of crypto

One of the most persistent accusations that have been levelled at cryptoassets, is their use for criminal activity. Functioning as they have so far with a high degree of anonymity, cryptoassets have been a godsent for people and organisations who wanted to conduct business outside the overwatch of regulators and law-enforcement. The now infamous darkweb marketplace ‘Silk Road’ was an online platform created to facilitate the selling off all manner of illegal items, mainly drugs, but also stolen credit cards, weapons and contract killings, all paid for by cryptoassets[10]. This platform would likely not have been possible without cryptoassets providing the foundation. Money laundering and payment methods in relation to cyber-crime are other topics that often come up when discussing the use of these assets. However, research suggests the illicit activity in fact accounts for less than 1% of all transactions, with scams making up the overwhelming majority[11]. Yet with terrorist organisations like ISIS having been known to focus heavily on obtaining funding through cryptoasset focused crowdfunding, even low percentages are still important for world security[12]. Likewise, North Korea has been known to finance parts of their military and weapons development programs through cryptoassets stolen in largescale cyber-heists[13].

Another sore point is the immense amounts of energy required to run all the software and processing power enabling the cryptoasset infrastructure. In September 2021, the Bitcoin system along consumed around 91 terawatt-hours of electricity annually. That’s equivalent to the entire electricity usage of Finland and constitutes a 10x in five years[14]. To put this into perspective, each Bitcoin transaction creates the same amount of CO2 emissions, as if you were to turn on your 34-inch plasma TV and leave it running for 3.309 hours straight[15]. And these figures are just for Bitcoin, imagine how many emissions are created by maintaining the entire cryptoasset system.

One final point to also keep in mind in this debate, is that so far, the most widely used cryptoasset, Bitcoin, has been created and maintained by a decentralized group of actors, who have not tried to specifically link the asset to any other business or purpose aside from providing a virtual currency that is accessible to everyone. This is an important point, because it has probably allowed cryptoassets to ‘fly under the radar’ of legislators up until now. This started to change quickly however, once Facebook a few years ago tried to launch their own cryptoasset, the Libra. Here was suddenly one of the largest and most influential companies in the world, proposing to launch their own cryptoasset, to be used primarily on their own platforms, and the reaction from legislators was quick. Because once vested interests and companies with global reach, start proposing their own currency, central bankers and economic planners, especially in Europe, realised the potential for cryptoassets to gain a user base and volume, which would challenge their ability to deal with economic and fiscal policy the way they normally can. And while the Libra idea was quickly dropped, due to the amount of pushback it received, it is more than likely that this will not be the last attempt that we will see. It might not be coming from the now Meta-group, but with the platforms, userbase and infrastructure many Big Tech companies possess today, the temptation seems almost too big to pass up.


Regulating crypto

Remember how we previously mentioned the quite low percentages of people in the US and Europe who actually hold virtual currency? Well, turns out that when asked, most Europeans cite a lack of knowledge as the main reason why they avoid investing in cryptoassets. At the same time however, about 40% of Europeans would prefer for cryptoassets to be more heavily regulated.[16]

The table below, taken from a Deutsche Bank report on the topic, show quite significant differences in attitudes toward cryptoassets among different age groups.[17]

Especially when it comes to questions about whether cryptoassets are an overall good thing for the economy and whether they are regulated enough, differences are noticeable.

It is hardly a secret though, that European legislators and the European Central Bank have started to take a much closer look at these assets, the more they became popular.

Where many member states today have implemented taxes on profits earned from owning cryptoassets, the EU is currently planning to revise its Anti Money Laundering (AMLD 6) rules, to also include cryptoassets.[18] The idea is to potentially require handlers of cryptoassets, i.e. cryptovaults (virtual bank vaults for cryptoassets) and crypto stock exchanges to require identification of the holders of cryptoassets, much in the same way as regular financial institutions would. This should go some way to limit the criminal uses of cryptoassets, but also goes somewhat against the anonymous principles that cryptoassets were built upon. Likewise, the Biden administration in the US, is taking a more strict approach to the market than they have so far, requiring cryptoasset brokers to apply more vigorous reporting and transparency rules[19].

How these changes will impact the cryptoasset marketplace is difficult to predict at this time, but what is certain is that these new currencies have come to stay and it seems they have now reached a potential where society at large is starting to ask itself how it wants to deal with their use and popularity.

Morten Clausen, Policy Officer




















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