In this issue we look at key economic shifts underway in our financial ecosystem and how investors, regulators and incumbents are wrestling with new issues and opportunities posed by these changes. Feel free to forward to other interested readers.
How Crypto is Impacting the Financial Ecosystem
VC Making Record Investments in Crypto in 2021 VC funding for blockchain and crypto startups surpassed previous annual records in June 2021, amid several developing items:
- Evidence that the Blockchain VC Industry is maturing (note however it still only represents about 1% of the global VC industry)
- Crypto trading firms themselves are starting to function as VCs
- Maybe - just maybe - we are underestimating the opportunities.
On this last point, I'm torn. I think there is a lot of "cash in the system" driving higher valuations. Strange side note: even Hamsters are getting great returns these days.
Crypto Market Cap Moves July vs Oct 2021
Top 10 Cryptocurrencies for October 2021 as reported by Forbes:
- Binance Coin
- USD Coin
Several notable moves since July 2021:
- Cardano moved up from #5 to #4.
- Solana moved into the Top 10, taking the #7 spot.
- Uniswap fell out of the Top 10
- Dogecoin fell from #8 to #10.
Notable that the 2 moving upward are widely seen as competitors to Ethereum. To me they both semi-competitive and semi-complementary. All 3 of these represent the rise of revised financial ecosystems, platforms that provide compute and transactional services to support the next generation of our economy.
Money Transfer Disruption Looms - Cryptocurrencies show early evidence of offering benefits that traditional cross-border payments companies can't match: Lower fees and immediate transaction settlements 24/7. By contrast, traditional money transfer companies take 2-4 days or more, charge much higher fees, and are often only available during banking hours.
Until now, cryptocurrencies had one drawback: they lacked the large amount of liquidity (access to usable funds) required to facilitate heavy flows of funds between different national currencies.
This is rapidly changing. Asheesh Birla shows how the liquidity of the crytocurriency world is approaching that of the traditional money transfer industry, fueled by sharp growth in the market cap of stablecoins - from $4B in 2019 to over $100B by mid 2021. This piece also offers a helpful glimpse into the interesting relationship between stablecoins and cross border payments.
The upshot: Crypto's disruption of the money transfer industry could benefit working families around the world by enabling faster, lower cost transactions. One thing to watch: cryptocurrency-based transfers rely on stablecoins, and stablecoins are currently attracting what seems to me to be an excessive level of fear and suspicion from regulators, as covered in the Deep Dive further below.
Risk and Insurance
Top Risk Concerns for Insurers. AXA has just released its Future Risks Report for 2021. Last year Pandemics were at the #1 spot in the list, but this year Climate Change regained the top spot it held in 2018 and 2019, followed by Cybersecurity at #2 and Pandemics at #3. Each year the AXA Future Risks report highlights top 10 emerging risks of concern for insurers. What is notable to me about this list is that it does not reference the significant risks associated with populations and their health.
Healthcare: Limitations of Value-Based Care. Broad consensus from healthcare providers is agreement that we need to graduate from pure fee for service (FFS) model, but health insurers generally need to do a better job engaging healthcare providers in co-designing a model that is actually sustainable. A central issue has been - how to handle risk in a sustainable way. As with the population health concerns I alluded to above, there is a lot to unpack here - and I plan to in future issues.
Deep Dive: What to make of regulatory FUD over Stablecoins (and crypto in general)
As HBR notes in this balanced piece, the economic benefits of stablecoins are significant:
- Stablecoins can enable lower cost safer, realtime and more competitive payments that what the current status quo banking system offers.
- Stablecoins could "rapidly make it cheaper for businesses to accept payments and easier for governments to run conditional cash transfer programs (including sending stimulus money). They could connect unbanked or underbanked segments of the population to the financial system."
In addition, cryptocurrency traders typically rely on stablecoins as a tool for capitalizing on volatility swings in crypto markets. For example, if the price of a crypto asset spikes, an investor might convert a portion of holdings to a stablecoin. When the price of the crypto asset drops the investor might do the reverse: convert that portion from stablecoin back to that crypto asset.
But, we're still worried...
In spite of the benefits and utility, there seems to me to be an excessive level of fear uncertainty and doubt (FUD) among federal and central bank stakeholders:
- That stablecoins could negatively impact not only crypto markets but also capital markets (WSJ)
- That stablecoins could compete with the US Dollar (Forbes), or with a central bank digital currency.
- Or cause financial instability (CNBC)
As a result federal and central bank regulators are considering a heavy arsenal of approaches to address these concerns. And the FUD is not only directed at stablecoins but at the crypto space in general, all under the notion of protecting investors and consumers.
As NLW notes in this podcast, crypto as an asset class has higher volatility and higher performance yet never has required a government bail out. So who exactly is asking for protection?
Near the end of this Bloomberg article see the quote from Celsius Network's CEO saying he believed "bank executives had called the SEC and state regulators to complain about crypto lending firms."
Current vs Hypothetical Pain
As I read all the pieces coming out on crypto regulatory moves, the lack of balance this conversation is striking - So many remarks seem to ignore the very real pain of the dysfunctional current system, while giving disproportionate weight to hypothetical pains of the emerging system.
One gets the impression that the comfortable incumbents who benefit from the status quo have already "priced in" the pain and dysfunction of the current system, and concluded that since it doesn't impact them personally, they can safely ignore it when making comparisons to the emerging system.
Don't get me wrong, I believe the regulatory community has conscientious, compassionate individuals who are dedicated to serving the public good, and for them, these comments are a cheap shot.
These comments are not directed at them, but rather at a behavior that we should have a conversation about.
A direct appeal to regulators
The headline commentary from the regulator community so far screams a near total absence of first hand experience, hypothesizing from afar, opining on things one has clearly not taken the time to personally learn and test.
This is ironic because the crypto space is hard wired for participation, with low barriers to entry. Nothing stops anyone of us from trying this stuff and learning firsthand.
And specifically from me to you: if you are a financial regulator, you most likely can afford - better than most Americans - to test and learn first hand. Open a crypto account, invest in altcoins and stablecoins and see for yourself. Put your bitcoin up as collateral, make yourself a loan. Convert between alt and stablecoins. Create and trade NFTs and see what that's all about. Try all the different things the rest of us are trying.
In other words, participate. Learn along with the rest of us. You'll see that there is a lot here that is far from perfect and frankly frustrating. And you'll see where the real issues can occur, and the real work and governance needs to happen.
There is a world of good and a world of hurt that can come out of this space. It is not without risk. But it is important enough to the future of the world's economies and the future of individuals and families, to warrant you and me personally investing time in first hand learning. If we take a test and learn approach our input will be way more relevant and helpful than the hypothesizing of those who never actually got involved.
A potential objection of someone with regulatory responsibilities might be: "Hey I'd love to participate and test and learn, but will I be creating a conflict of interest if I do this?" If that is your active concern, one option is to create or support innovation safe harbor legislation, like this example.
And know this: People in the US and other countries are testing and learning because they don't have a strong sense of confidence in the current system. On a gut level, most Americans are clear on one thing: you can't rely on wages alone. You've got to have some kind of access to capital that will grow in value or else you won't have what you need for you and your family. That reality is driving what the comfortable like to label - condescendingly - as "reckless retail investor behavior".
The emerging crypto space is immature and full of rough edges, but already it appears to be more capable, more efficient, more open, more accessible and equitable than anything we've seen from the current financial ecosystem, with its voluminous history of corruption, racial bias, onerous fee structures, lopsided inequity and its undeniable track record of reserving meaningful upside for its centralized inner circle while tossing crumbs and fees to the rest of the world.
Our opportunity is to see how to maximize the good and prevent the bad - and we can do that together with a test and learn approach.
What's happening outside these days
October 9: October Big Day with eBird
Thank you again for reading! Best wishes for progress and success in your endeavors, and hope you can get outdoors to enjoy the changing of the season.
Disclaimer: Opinions mine. Information provided here is not intended to serve as investment advice.